How should investors assess climate transition risk in their portfolios?
They can focus on firms with strong environmental practices, which are better positioned to navigate changing regulations, consumer preferences, and market dynamics
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FINANCIAL markets are among the most effective tools we have to fight climate change, and the net-zero transition will require trillions of dollars in annual investment between now and 2050, according to analysts.
While that’s certainly an impressive number, given specific climate exposure-related mandates, investors at this stage want to understand the risk and return dynamics reflected in a company’s environmental score. So, how can investors assess climate transition risk in their portfolios?
Both to answer this question and to better understand the relationship between stock returns and a company’s carbon emissions, I conducted a comprehensive analysis of MSCI Europe returns from 2007 to 2022 that incorporates supply-chain related Scope 3 emissions. The study had two intriguing findings.
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