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A Climate-Resilient Portfolio Isn't Just for Hippies

“We need to change the way we think about real investing from the tree-hugging and polar bears and start thinking about it more in terms of this economic transition,” says Lauren Smart, speaking at the Inside ETFs conference.

Investing in environmentally-friendly companies is no longer just an ethical consideration. Companies that are more resource-efficient and that make more with less are on the right side of macroeconomic trends, and it’s just common sense, said Lauren Smart, managing director, global head of financial institutions business, S&P Dow Jones Indices.

“We need to change the way we think about real investing from the tree-hugging and polar bears and start thinking about it more in terms of this economic transition,” Smart said, speaking at the Inside ETFs conference in Hollywood, Fla. this week.

In a recent global landscape report, world leaders said that in terms of impact and likelihood, the top three risks are extreme weather events, natural disasters and climate change. These were higher on the list than traditional financial risks, such as deflation, unmitigated inflation and asset bubbles, Smart said.

She cited a Bank of America Merrill Lynch report which found that environmental, social and governance factors are the best signals for fundamental future risk and that ESG is too critical to ignore.

“Why would those things be the case if it was just about ethical exclusions based on your values?”

There are major situations that will affect the economy and transform the world in which we live. “That has implications for businesses and investors in those businesses.”

We’re currently in a resource revolution, where there’s significant pressure on resources worldwide. On the demand side, the population is expected to grow to up to 9 million by 2040. On the supply side, we’re seeing the erosion of natural resources and pollution of our oceans. We’re running out of landfill places, and climate change is causing more unpredictable weather events.

“Something has to give,” Smart said.

There are physical risks of climate change, such as the threat of rising sea levels. But there are also transition risks, and some companies are going to be the winners; others will be the losers.

For example, if we keep global warming levels beneath the catastrophic levels, 80 percent of fossil fuel reserves have to stay underground. But the valuations of those fossil fuel companies

“It’s not because they just don’t like those nasty coal companies,” Smart said. “It’s because they think that there’s significant economic risks associated with their business models.”

Over the next 15 years, approximately $93 trillion will be needed for investment in low carbon infrastructure. To meet that demand, we’ll need more clean energy, sustainable agriculture, water efficiency, low carbon transport infrastructure, smart technology, and waste reduction and recycling, Smart said.

“You’ll start seeing a lot more of these types of companies.”

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