A Wave Approaching the Market
INVESTORS ARE FORWARD-LOOKING
Investing, by definition, is the organized and deliberate attempt to put available funds to work in the market to generate returns in the future. It is from the economic growth enabled by the use of those funds that investment returns derive. When investors think not only about their own needs but about investing for the benefit of children and grandchildren, then they naturally must consider a longer time horizon and be aware of possible long-term impacts on the markets.
The world’s nations have taken note of the resounding alarms raised by scientists regarding the impacts of carbon dioxide emissions on our climate. Carbon dioxide — which for more than a century has been the primary waste byproduct (however unintended) of the world’s fossil-fuel based industries — has been concentrating in the atmosphere at what we now know are dangerous levels. Science has firmly established that this molecule acts to trap heat within the earth’s atmosphere, causing excessive warming of the globe’s air and acidification of the oceans. Scientists around the world, who have studied the problem intensely since 1988, have declared carbon emissions to be a serious threat to the historical climate the world has enjoyed.
As governments begin to address the need to limit carbon dioxide (and other heat-trapping) emissions, the high societal costs of emitting carbon are being identified. In Europe, Asia, California and increasingly within other states and Canadian provinces, regulatory schemes are shifting the costs of emitting carbon back to the responsible actors. Nascent markets have arisen that allow for the pricing and exchange of carbon “offsets.” Despite opposition and even denial from the fossil fuel-industry, whose economic interests are severely threatened by the scientific evidence, the weight of the international scientific and political certainty supports the urgent need for regulations to limit future carbon emissions or risk irremediable impacts to the world’s oceans, climate and global ecosystems.
Introducing the “Carbon-Priced” portfolio screen
With an eye perennially on market trends, TIA has determined that the use of market forces to impose a price on carbon emissions is well underway and is being seen as a successful solution. Increasingly therefore, the costs of emitting carbon dioxide are being imposed on the offending businesses and industries. Whether applied through a Cap and Trade program or a Carbon Tax, those responsible for the emissions will incur market penalties that will increasingly motivate them to effect reductions in their emissions.
California has served as a test case with its early roll-out of AB 32’s Carbon Cap and Trade mechanism, now with quarterly auctions of carbon credits. TIA has been able to observe the process and evaluate an investment response, developing a methodology to filter equities based upon an economic assessment of the carbon costs of “business as usual.” This analysis devalues some securities with high carbon exposure and increases the valuations of those securities whose low-carbon business models would benefit from these trends. TIA can now apply this filter to existing client portfolios, even before the market more broadly awakes to the wholesale reassessment of equity valuations based upon their risks to carbon. TIA uses its “Carbon-Priced” filter to build what is being called our “Future Generations” strategy for long portfolios.
TIA’s Future Generations™ Strategy for Investor Portfolios
TIA provides custom portfolio designs that best reflect our clients needs and preferences, creating unique separately-managed portfolios for our clients. Each portfolio derives from individual investment choices made by our clients from among a number of well-known factors: debt. vs. equity, domestic vs. international, large cap vs. small cap, value vs. growth, etc. Now, for the first time, we are also able to allow our clients to elect to apply our “carbon-priced” filter as well, to elect the extent to which the portfolio screens for carbon-priced market opportunities. Do you want to “divest” your portfolio from fossil fuels? Now you can choose the degree to which your portfolio is divested of fossil fuels or bears risk based on exposure to the price of carbon. (If you are holding mutual funds, you can see how much of your portfolio has that exposure by clicking this image on the right, and going to Fossil Free Funds.) If you would like to know how much of your TIA portfolio has exposure to carbon pricing, click here to contact us. We are happy to discuss how we can apply the TIA Carbon Priced to create the unique portfolio that reflects your feelings about fossil fuels and carbon emissions.
TIA’s Future Generations™ strategy is now available for existing and new clients. If you are interested in learning more and/or implementing the Carbon-Priced screen for your portfolio, please click here to contact Dr. Jonathan Tiemann.