Author: Will Goodhart
This article was originally published by Sustainable Investor, 14 November 2022.
CFA UK Chief Executive Will Goodhart stresses the need for further education on climate in investing, and outlines 5 basic principles you can follow to grow your own knowledge for the net-zero transition.
This year’s COP27 climate conference takes place in the shadow of the war in Ukraine, growing tensions between China and the US, as well as soaring energy and food prices around the world. Yet, whilst the attention of global media and domestic policymakers may be focused elsewhere, the need for concerted action to build a more sustainable global economy is no less urgent.
To solve this truly global crisis, we need a truly global solution - and that begins with education.
Tackling the climate emergency and building a more sustainable future for the planet is no longer the responsibility of a select group of climate scientists and investment specialists, we all have a role to play. The good news is that you do not need to be a climate specialist to understand and implement climate investing across your portfolio, you just need to know these 5 basic principles:
Get to grips with the basics
Conversations about climate and its impact on investment strategy are moving from niche to mainstream and, as an investment professional, you need to become comfortable with the basic concepts and terminology of climate investing.
Whilst many of us are familiar with terms such as greenhouse gases, extreme weather events and biodiversity, understanding the inter-relationship between these topics and their impact on the financial ecosystem requires another layer of understanding.
Many professionals come from science backgrounds, but historically climate science has not been a core topic on the syllabus for investment trainees. Whilst that is changing with the latest cohort of new recruits, those that haven’t had the benefit of dedicated training on climate investing should seek it out to ensure they’re equipped for the challenges and complexities of the changing investment environment.
Don’t look back when it comes to climate investing
Investment professionals are familiar with looking at the past to predict the future, but while in many cases the past can be a valuable measure of the future, it will not work for our climate. Extrapolating from the past is not a reliable guide for what our future planet looks like and change is happening at such a drastic pace that even the not-so-distant past feels like a lifetime ago when it comes to climate.
Scenario planning is a vital part of any investment professional's role, and this is still the case for climate investors. Investment professionals need to think differently and understand how to interpret climate metrics and data in order to be able to analyse physical and transition risks and apply these to scenario planning. The industry needs to equip professionals with the tools and understanding to ensure this is part of everyday planning.
Talk the talk before you walk the walk
Just as investment professionals need to understand the basics of climate change in order to be climate capable, they also need to have the facilities and practical skills to communicate this with clients. While client conversations are currently focused on education, as climate understanding becomes mainstream the conversations will shift to action.
Having a thorough understanding of client's needs and being able to acutely express how climate change will affect these are vitally important to all client relationships and successful investment strategies.
Understanding where and how to invest
In order to efficiently build a climate investment portfolio, analysts need to understand and analyse new sources of data taking into account the physical and transition risk associated with climate change. They need to evaluate the range of investment strategies that can be used to incorporate climate-related factors into portfolio management and construction, and above all, they need to think long-term and stick to a strategy even if a portfolio underperforms in the short-term.
Many of these are skills already ingrained in the training and education for investment professionals, but understanding how to apply a climate lens to decision making is vital to future strategies.
Engaging and collaborating
The investment industry needs ongoing engagement and collaboration to drive wholesale change. Why? Because it's the right thing to do, and without it, we may never reach our goals.
Investment professionals often talk about collaboration but it is not a skill they have often built. It is important for firms to participate in alliances like the Net Zero Asset Managers Initiative, the IIGCC or the PRI, but individual investment professionals then need to engage to work collaboratively to drive systemic change. That can be challenging for people that are accustomed to working within the confines of their firm, but is often rewarding.
Learning programmes such as CFA UK’s Certificate in Climate and Investing among others offered by members of the Sustainable Finance Education charter group are there to help investment professionals build their climate capabilities, but these simple five rules are a good place to start.
To solve this truly global crisis, we need a truly global solution - and that begins with education.
Tackling the climate emergency and building a more sustainable future for the planet is no longer the responsibility of a select group of climate scientists and investment specialists, we all have a role to play. The good news is that you do not need to be a climate specialist to understand and implement climate investing across your portfolio, you just need to know these 5 basic principles:
Get to grips with the basics
Conversations about climate and its impact on investment strategy are moving from niche to mainstream and, as an investment professional, you need to become comfortable with the basic concepts and terminology of climate investing.
Whilst many of us are familiar with terms such as greenhouse gases, extreme weather events and biodiversity, understanding the inter-relationship between these topics and their impact on the financial ecosystem requires another layer of understanding.
Many professionals come from science backgrounds, but historically climate science has not been a core topic on the syllabus for investment trainees. Whilst that is changing with the latest cohort of new recruits, those that haven’t had the benefit of dedicated training on climate investing should seek it out to ensure they’re equipped for the challenges and complexities of the changing investment environment.
Don’t look back when it comes to climate investing
Investment professionals are familiar with looking at the past to predict the future, but while in many cases the past can be a valuable measure of the future, it will not work for our climate. Extrapolating from the past is not a reliable guide for what our future planet looks like and change is happening at such a drastic pace that even the not-so-distant past feels like a lifetime ago when it comes to climate.
Scenario planning is a vital part of any investment professional's role, and this is still the case for climate investors. Investment professionals need to think differently and understand how to interpret climate metrics and data in order to be able to analyse physical and transition risks and apply these to scenario planning. The industry needs to equip professionals with the tools and understanding to ensure this is part of everyday planning.
Talk the talk before you walk the walk
Just as investment professionals need to understand the basics of climate change in order to be climate capable, they also need to have the facilities and practical skills to communicate this with clients. While client conversations are currently focused on education, as climate understanding becomes mainstream the conversations will shift to action.
Having a thorough understanding of client's needs and being able to acutely express how climate change will affect these are vitally important to all client relationships and successful investment strategies.
Understanding where and how to invest
In order to efficiently build a climate investment portfolio, analysts need to understand and analyse new sources of data taking into account the physical and transition risk associated with climate change. They need to evaluate the range of investment strategies that can be used to incorporate climate-related factors into portfolio management and construction, and above all, they need to think long-term and stick to a strategy even if a portfolio underperforms in the short-term.
Many of these are skills already ingrained in the training and education for investment professionals, but understanding how to apply a climate lens to decision making is vital to future strategies.
Engaging and collaborating
The investment industry needs ongoing engagement and collaboration to drive wholesale change. Why? Because it's the right thing to do, and without it, we may never reach our goals.
Investment professionals often talk about collaboration but it is not a skill they have often built. It is important for firms to participate in alliances like the Net Zero Asset Managers Initiative, the IIGCC or the PRI, but individual investment professionals then need to engage to work collaboratively to drive systemic change. That can be challenging for people that are accustomed to working within the confines of their firm, but is often rewarding.
Learning programmes such as CFA UK’s Certificate in Climate and Investing among others offered by members of the Sustainable Finance Education charter group are there to help investment professionals build their climate capabilities, but these simple five rules are a good place to start.
Will Goodhart, CEO, CFA UK
