Investments and climate change: two worlds that at first glance seem to be at opposite ends of the spectrum, yet are in reality closely intertwined. Because every choice we make can contribute a small piece to the protection of the planet: from the food we eat, to the means by which we travel, to the shops where we buy things, right down to the way we use our savings. The topic was discussed in Milan, during the SRI Week.

Why climate change is a financial risk

Climate change threatens the balance of ecosystems, the quality of our lives, the survival of animal and plant species. And – despite this not being emphasised enough – investments too. Five types of risk have been identified:

• Environmental risk. Extreme weather events can destroy buildings and infrastructure, dry out land, and cause the availability of raw materials to collapse.
• Technological risk. Companies must act quickly to develop new technologies capable of supporting a lower-impact economy; failing to do so, they are destined to fall dramatically behind. Dragging their investors' capital down with them.
• Legal risk. Governments around the world are taking action on climate. And for companies, this often translates into real costs. The clearest example is that of so-called stranded assets. If the promise to keep the rise in global temperature within 2 degrees centigrade is kept, between 60 and 80 per cent of the fossil fuel reserves held by listed companies cannot be burned. If the target is lowered to 1.5 degrees centigrade, the percentage will exceed 90 per cent. As a result, shares in oil companies could lose much of their value. And, with them, their investors' portfolios. The solution is to get ahead of the curve: companies and institutions must reduce their environmental impact before a law compels them to do so.
• Reputational risk. Think of BP or Volkswagen, once strong and solid brands that literally crumbled due to environment-related scandals. And think of the staggering losses suffered by those who had chosen them for their investments.
• Social risk. According to Unep, by 2050 there will be 200–250 million environmental refugees worldwide. We are talking about people who are forced to flee their home countries due to drought, flooding, and extreme weather events. Even the more fortunate, though not compelled to emigrate, will still have to contend with the impact of climate change on their health. All of this will require a rethinking of the welfare system and the development of new economic, financial and insurance frameworks.

How the environmental impact of investments is measured

If companies that fail to prepare for climate change are destined to pay the price financially, it is wise to try to protect one's investments. Most investors commit to calculating the tonnes of CO2 emitted by the companies in their portfolio. The most common method is that of Scopes:

• Scope 1 covers emissions arising from sources owned by or directly controlled by the company in question (such as fossil fuels used to heat buildings).
• Scope 2 includes emissions associated with the energy the company purchases (meaning someone else is burning the fossil fuels).
• Scope 3 encompasses emissions connected to all other activities of the company: employee travel, the supply chain, use of manufactured goods, and so on.

International agreements almost always refer to Scope 1. Moreover, with the other two Scopes the problem of double counting comes into play: emissions that fall under a company's Scope 2 or 3 will, in fact, be under another company's Scope 1. But the environmental impact does not begin and end with CO2: there is also the water footprint, deforestation, and the ecological footprint. The issue, in short, is complex. And many people are working to find a calculation method that is reliable and "all-encompassing".

All the ways to reduce environmental impact

Having measured the environmental impact of one's investment portfolio, the time comes to do something to reduce it. There are three strategies.

Engagement. Talking to companies is often the first step; the approach is known as soft engagement. With hard engagement, on the other hand, the intervention becomes more decisive: the investor tables motions and speaks at the shareholders' meeting.

Divestment. In recent years, many investors have chosen to sell (wholly or partially) shares in companies operating in the fossil fuel sector. It is a much quicker and "safer" process than engagement, though it must also be said that those shares can still be purchased by others.

Reallocation. Having moved away from fossil fuels, one can shift one's investments towards other companies that support the transition to a low-carbon economy. This is the focus, for example, of the Divest-Invest initiative.