Climate Change

Issue Brief: Climate Change

The Earth’s climate has changed markedly over the last century. From the Arctic Ocean to the Himalayas, ice glaciers are melting unseasonably, contributing to a rise in sea levels, while at the same time, rivers are drying up. Increasingly severe weather patterns are disrupting ecosystems, agriculture, businesses, communities, and livelihoods on all continents. For example, farmers in parts of the South and mid-Western United States have experienced record drought conditions, driving commodity and food prices higher. And thousands of species have been put at risk as local water sources are disappearing. From a scientific perspective, the Intergovernmental Panel on Climate Change (IPCC) has established that the Earth is warming—accelerated by industrialization, the burning of fossil fuels, and deforestation—and that the damage done to date is largely irreversible. For Calvert and other investors, addressing climate change is one of the most urgent issues of our time. While progress toward emissions reductions has been made at Durban and other international climate change conferences, a binding country-specific agreement remains elusive. To help forestall a worsening of the crisis, new, innovative technologies, fresh thinking, and clean-energy solutions must be advanced globally.

Adaptation for the 21st Century

Until recently, the world has focused primarily on climate change mitigation, which emphasizes reducing greenhouse gas (GHG) emissions and pollution to stave off climate change. While this is still a critical sustainability goal, Calvert believes that there must also be a focus on more strategic, adaptive strategies, or “Climate 2.0.” This entails building more resilient infrastructure systems, understanding our agricultural vulnerabilities, and developing advanced water technologies to cope with drought, disasters, and resource scarcity. While challenging, these issues also present robust business opportunities for companies to produce innovative technologies—and for investors interested in these types of companies.

Measuring Corporate Response to Climate Change

From agriculture to manufacturing, companies across all industries are affected by climate change to some degree, so Calvert reviews all companies for their climate-related business risks and opportunities. We concentrate our review, however, on the most carbon-intensive industries—such as oil and gas, mining, utilities, and automotive. In the U.S., for example, automobiles account for nearly 20% of the country’s energy-related greenhouse emissions.1We also consider potential regulatory impacts, especially as they relate to geopolitical issues. From a financial perspective, Calvert evaluates how climate change could impact a company’s business, products, and profitability both near-term and in the future. One of our primary means of evaluating a company is through its sustainability reporting. We favor companies that routinely publish climate change reports that clearly delineate their climate-related business risks, as well as their strategies for managing these risks, including in their supply chains. Another major area we evaluate is GHG emission levels, since Calvert regards carbon emissions as a key driver of global warming. We consider a company’s direct emission levels, as well as its efforts to reduce or eliminate them. Beyond direct emissions, we analyze overall energy use, energy efficiency, and any product-related emissions. For an auto or car rental company, we would examine fleet fuel efficiency, for example. Importantly, we encourage companies to adopt GHG emission targets in line with the IPCC’s goal of reducing global emissions by 80% by 2050. On the side of opportunity, we look at whether a company is investing in clean or alternative energy technology, energy efficiency, or is engaged in research and development in these areas. As climate change is a highly complex, science-driven topic, Calvert regularly consults with outside experts to inform how we evaluate and set our climate change priorities. We consult with industry and scientific specialists from both governmental and non-governmental organizations (NGOs), corporations, and academic institutions from around the world.

The Supply Chain: A Critical Link

A company is only as strong as the weakest link in its supply chain. The effects of climate change influence all aspects of a company’s business, including its suppliers. The rising cost of one input—or the total loss of a critical material—can throw a kink into the entire chain and threaten corporate profitability. Calvert asks companies to monitor their supply chains in areas such as controlling GHG emissions, using “green” materials and packaging, improving fleet logistics, and embracing industry best-practice initiatives, where possible. The Electronic Industry Citizenship Coalition (EICC), for example, is developing a standardized approach that electronics companies can use to measure GHG emissions in their supply chains. We also keep a sharp eye out for companies whose suppliers or products are particularly susceptible to changes in climatic conditions. We’ve seen coffee crops in South America, for example, compromised by torrential rains and high temperatures. In the U.S., droughts have severely reduced peanut crops, pushing peanut prices sky-high. Clearly, it’s important to ascertain how food and other consumer product companies account for and adapt to these types of environmental risks, balanced with their responsibilities to the farmers, land, and communities in their supply chains. Calvert also looks at other types of supply chain risk, such as whether financial or insurance companies may be highly exposed to carbon-intensive investments.

Challenges and Opportunities Ahead

The challenges of climate change, while daunting, are also creating opportunities in nearly every facet of life. As binding international agreements over carbon-emission targets—and how to pay for them—remain stalled, the private sector will play an increasingly pivotal role in both climate change mitigation and adaptation. Greater energy efficiency and conservation technologies are needed for everything from homes to office buildings to automobiles. More efficient, high-tech batteries, for example, can help lower greenhouse gas emissions in the carbon-intensive truck and auto industry. Perhaps most pressing, infrastructure improvements and new technologies will be needed in the high-density, urban “delta” areas, where more than half the world’s population resides. These areas, which include New Orleans and New York City (in the United States) and Singapore (in Southeast Asia), are particularly susceptible to storms and flooding as sea levels rise.

Moving the Needle

Over the years, Calvert has made moving the needle on the issue of climate change a business priority—in terms of our investment products, advocacy efforts, and our own corporate public policies and carbon footprint. Calvert works actively with a number of organizations, including the Carbon Disclosure Project (CDP), and the Investor Network on Climate Risk (INCR), to advance climate change solutions. To adapt to climate change, we believe governments, businesses, and investors need to focus sharply on developing alternative energy, energy efficiency, and the broadest array of energy options. That’s why Calvert offers alternative energy and water sector investment strategies that invest in companies at the forefront of developing clean energy and energy-efficient products and technologies. Looking ahead, we believe there are opportunities for companies and investors to prosper as the world develops water, energy, agricultural, and infrastructure solutions to meet the urgent challenges of climate change.

1. The Environmental Defense Fund, “Global Warming on the Road: The Climate Impact of Automobiles,” www.edf.org/sites/default/files/5301_Globalwarmingontheroad_0.pdf

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SRI criteria will vary from fund to fund. Please see a fund's prospectus for details.

Issue Expert: Ellen Kennedy

Issue Expert: Stu Dalheim

Issue Expert: Rebecca Schlesinger Henson

Rebecca Schlesinger HensonAs an Environment Analyst, Ms. Henson focuses on climate change, renewable energy, and energy efficiency and is currently responsible for analyzing the auto, homebuilding, and insurance industries.

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