Is coronavirus the road map for navigating the market impact of climate change?

Coronavirus unwittingly may be the crisis test for how portfolios may have to deal with climate change down the road, said Tamara Close, founder of Montreal-based Close Group Consulting.

The firm is dedicated to helping both investors and managers navigate the current environmental, social and governance (ESG) issue maze. She advises boards, corporations and pensions on a variety of trends and topics that are key in managing portfolio risk.

Executives struggle with de-risking their portfolios for climate change, although it is unclear how dire the impacts on markets will be as the planet comes to terms with how the world will be forever changed by humans’ impact on the planet.

According to images and data collected by NASA and the European Space Agency, the levels of airborne nitrogen dioxide dropped in major cities like Beijing during the quarantine in China. Ironically coronavirus may just save more lives than we lose from the virus due to the lower impact pollution is now having in countries like China, which have seen a sharp decline in smog.

Still Close emphasized that in the case of climate change, it is a long-term trend that unlike the current situation being monitored by WHO many companies, investors and alternative investment management firms can act now on in order to avoid destructive portfolio impact.

Close’s consulting business focuses on ESG integration, which takes a more holistic approach to reviewing an investment portfolio that spans far beyond the age-old question of whether to divest from fossil fuel investments.

She is practical in her approach, which comes from her work at Canadian firm PSP Investments, where she was senior director of public markets and absolute return strategies and first began eyeing how to optimally integrate ESG initiatives within a broad investment portfolio.

“It’s not flipping a switch and how you do this is not that obvious,” she said in reference to oil and gas companies transitioning to a lower carbon economy. Some employ scientific experts and that is a key indicator, she added.

Much has been made about companies going net-zero, but for Close it is great to have a target, but it is one that may take many years to achieve. The problem, she said, is that people are apt to forget about the long-term targets.

And then there are some managers that just pay lip service to ESG concerns. At Close Group, there is a review that takes place and it has to do with the maturity of the organizations approach. She is currently building out a technology solution that allows managers to do a self-assessment. As Close Group collects data on the managers across 40 different areas, the long-term plan is to allow managers the ability to compare themselves against their peers.

Close works with both pensions and managers, including private equity firms.

“ESG works well with alternative investments because these issues are longer-term in nature,” she added. Most private equity drawdowns take place over years, rather than months.

Then there is the list of ESG data providers and there is lots of sometimes conflicting research to consider. It can be difficult for managers to map it altogether, but she often advises private equity managers to seriously review sustainability reporting on their underlying companies especially as some prepare to go public. For other private markets firms, ESG is key from both the stakeholder and board member perspectives.

Close said that she has seen progress in recent years in ESG and climate change related investment. But she added that if the global COVID-19 pandemic would have taken place two years ago, it could have derailed much of the progress that has been made recently.

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