Pax World believes a company’s programs and policies addressing climate change risks are indicators of the strength of its overall management and financial health. Pax views a firm’s effort to mitigate risks and adapt to climate change as a robust and increasingly important indicator of both the overall quality of a company’s management and its ability to add value over the long term.
There are two kinds of risk created by climate change: carbon risk, which is the risk that emissions will be increasingly regulated and costly; and physical risk, or vulnerability to the physical changes created by climate change. Some companies view any kind of climate risk as speculative and long-term, but as we have seen with the gradual increase in severe weather, those risks may manifest themselves any time. Some risks associated with climate change are more predictable and adaptation need not wait. It is difficult to predict changes in the regulatory regime (carbon risk), but it is also true that the more the climate changes, the greater the pressure for regulatory response, even in places like the United States that lack national regulations governing greenhouse gas emissions. In contrast, nearly all companies are vulnerable to the risks associated with increasing challenges related extreme weather, drought, floods, and sea-level rise. Consider a few examples:
- Insurance and reinsurance companies face increasing liabilities related to extreme weather events.
- Food and beverage companies face supply chain disruption as climate change affects agricultural production.
- Electric utilities face risks associated with access to water, which is used in large quantities to run most power plants. Climate change will continue to alter patterns of water availability, making some regions far wetter and some much drier.
- Any company operating in low-lying seacoast areas may be vulnerable to sea-level rise as melting continues to shrink polar continental ice.
Pax recognizes that climate-related risks also include reputational and competitiveness risks, and while it may be difficult to quantify these precisely, this does not diminish their importance. A recent report by the Economist Intelligence Unit states that:
“More than one-half (54%) of executives polled for this report say that their companies have a coherent policy in place to address climate change, although the scope of such policies varies widely. Actions focus on core internal activities and facilities, rather than involving suppliers, business partners and customers. As one executive highlights, producing too much carbon is a new indicator of inefficiency.”1
Pax evaluates each firm’s management of climate change risks by examining, among other factors, its past performance and whether the company has policies and programs in place to address these issues. While the means and methods to address climate change vary widely among industries, virtually any company can mitigate the impact and save money by addressing its use of energy, both in terms of efficiency and source (e.g., renewable vs. fossil fuel). Pax believes that physical risk should also be part of any company’s overall assessment of climate-related challenges, and it seeks to invest in companies that understand and take steps to reduce their liability for any or all risks associated with a warming climate, including sea-level rise, access to fresh water and increasing severity or frequency of floods, fires, droughts and severe storms.
Pax generally avoids investing in companies that bear significant risks related to climate change and seeks to invest in companies that demonstrate a complete understanding of how climate change affects their supply chains. Pax recognizes that these needs are much greater for some companies than for others, including those that depend on agricultural production or whose supply chains are particularly energy-intensive. Pax believes the understanding and management of climate-related risks is a key issue for most companies in the industrial, energy, materials and utilities sectors.
Pax seeks to invest in companies that are transparent about their own contributions to climate change and report on their own mitigation and adaptation efforts. Thanks to global efforts like the Carbon Disclosure Project, which Pax has long been a signatory to, the roster of companies that do report emissions and risk management is growing.
Pax also works to manage the carbon risks of our portfolios, and for that purpose we benchmarked our five largest portfolios in 2013 and will continue to manage the carbon intensity of all our portfolios, seeking to keep their carbon intensity below that of the funds’ benchmarks. The figure below shows the carbon intensity of Pax World’s Balanced, Global Environmental Markets, Global Women’s Equality, Growth and International Funds compared with their benchmarks as of June 2013.
At the moment, the world gets the majority of its electricity from coal combustion. There is a vigorous debate over how quickly and economically the world can reduce its reliance on coal — dirtiest of the fossil fuels in terms of GHG emissions — and move toward lower- or zero-carbon sources of electricity.
Nuclear power is often described as a zero-carbon source. Although there are significant emissions associated with construction of nuclear plants, the operation of nuclear power reactors emits virtually no greenhouse gases. Pax does not consider current nuclear power technology a long-term answer to the problem of electricity generation, as problems of nuclear waste disposal and the proliferation of materials that could be used for nuclear weapons have not been solved. However, many of the utilities that are leaders in advancing renewable energy solutions such as wind or solar power also own and/or operate nuclear power plants. Consequently, Pax does not believe that avoiding all utilities with any involvement in nuclear power is a prudent choice; as in doing so we would be foregoing investments in some of the largest producers of alternative energy. Pax does not consider nuclear power a solution to climate change. However, we do not automatically exclude investments in utilities that currently own and/or operate nuclear power plants, provided that they meet all other sustainability criteria, including safe operation of nuclear power plants, and that they have not taken public policy positions opposing the regulation of greenhouse gas emissions.
1Economist Intelligence Unit, “Countdown to Copenhagen: Government, business and the battle against climate change,” 2009. The issues highlighted above are illustrative and do not necessarily reflect the full range of climate change issues Pax World may consider in analyzing a particular security for investment. The Pax World Funds’ sustainable investing policies may inhibit the Funds’ ability to participate in certain attractive investment opportunities that otherwise would be consistent with its investment objectives and other principal investment strategies.