Going Green: A climate policy toolkit for investors

Climate change has become a central concern for investors. At Aberdeen Standard Investments (ASI), we have already made huge strides to enhance engagement with companies on climate risk, carbon-foot-printing portfolios and building tailored climate portfolio solutions. However, companies do not operate in a vacuum. They are affected by the political and policy environment in the countries in which they have operate and generate revenues.

Our four step framework for analysing climate policy risk and opportunity provides investors with a process to incorporate macro political factors into their investment strategies. This can be seen as a checklist for investors to understand the climate policy risks they are exposed to via both micro and macro investment strategies.

The EU stands out as a leader, with strong political commitment to combating climate change backed up by robust market instruments, providing a relatively stable environment for investment. Nevertheless, further work to decarbonise the economy is necessary, providing opportunities for astute investors. 

The United States case highlights how party politics can stymie the low-carbon energy transition. The country is deeply divided on the importance and causes of climate change. The 2020 Presidential election is an important waymark; a Democratic President would improve action on climate change. The upshot is that investors may be better off targeting state-specific opportunities, via municipal bonds, local infrastructure projects or region-exposed companies, which benefit from a more stable and supportive local political environment.

In China, the government’s pursuit of greener energy has led to them meeting their Paris 2020 commitments ahead of time. However, much more needs to be done and there is a danger that institutional commitments in China are weakened by economic pressures and a shift to quality rather than scale in renewables that needs careful policy management.

India’s multi-party system alongside low voter interest means that climate policy action has been limited so far. However, there are signs that air quality issues and severe weather risks may help to create more immediate pressure to act from companies that are affected. Incentives for renewable energy and an increasingly open market are creating new opportunities for investors, although issues of low transparency and weak enforcement of regulation remain acute.

Read the full white paper from Aberdeen Standard Investments: Going green: A climate policy toolkit for investors