Impact Blog
What investors can do in the wake of IPCC climate change report

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Calvert disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Calvert are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Calvert fund. References to individual companies for Engagement or Research purposes are provided for illustrative purposes only and may not be representative of the results of all of Calvert’s engagement efforts. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results.

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      By John Streur, President and CEO, Calvert Research and Management and Yijia Chen, ESG Quantitative Research Analyst, Calvert Research and Management

      Washington - The Intergovernmental Panel on Climate Change (IPCC) report released on October 8 was the latest in a series of clear signals indicating that change to our global energy system is urgently needed.1

      To avoid a 1.5 degree Celsius rise in temperature (with no or low overshoot), annual emissions need to be about half of the current rate. Among the significant contributions of the report are its focus on the impacts of a 1.5 degree Celsius (2.7 degrees Fahrenheit) temperature rise above preindustrial levels, a scenario that could happen by 2040 if the current rate of greenhouse gas emissions continues.2 However, annual emissions are projected to increase before energy demand peaks in 2030. This forces us all to consider a planet where significant impacts occur not in some distant day in the future, but in our own lifetime.

      Even when the existence of this possibility becomes more accepted, a more positive way forward faces challenges. Climate change is a global problem that requires everyone's efforts, but its immediate consequences are less visible, which can make it easier to push problems down the road in favor of short-term results. In addition, climate change is a social justice issue. Those who will be most negatively affected by a global rise in temperatures may not be the ones who contributed most to the crisis, and thus may not be the ones who are most able to influence positive change. Moreover, even if humans reach zero carbon emission starting tomorrow, changes that are already happening will continue - for instance, methane stored in the Arctic will still be released into the air with the thawing permafrost, which is 20 to 30 times more potent than carbon dioxide as a heat-trapping gas.3

      The report makes it clear that a change to our global energy system is imperative. One way that both individual and collective action can potentially make an impact is through investments. Investors have an incentive to make sure the financial products they invest in are accounting for the risks associated with climate change so they are better positioned for long-term success.

      How investments can help drive change

      At Calvert, we believe that our investment strategies act to encourage companies to move in a positive direction on environmental, social and governance (ESG) issues.

      As part of both our research and engagement process, we seek to understand how companies are preparing for and benefiting from the transition to a lower carbon energy system. We recognize that energy efficiency and the use of renewable energies are essential both for the health of the planet and a company's ability to remain competitive over time, and take that into account as we develop our views on companies.

      To provide transparency, Calvert includes impact metrics, such as fossil fuel reserves, greenhouse gas emissions and toxic emissions, on many of our fund fact sheets. That allows investors to compare the impact of such investments as compared to a benchmark, which Calvert believes is essential.

      Calvert also seeks to drive change through our engagement activities. Individually and as part of coalitions, we use strategies ranging from direct dialogue to shareholder resolutions to proxy votes to help companies understand that investors want to know their plans for a low-carbon future and options to adapt to such scenarios.

      System recommendations

      Calvert agrees with the IPCC recommendation that fossil fuel must be phased out rapidly as a primary energy source. From the investors' perspective, this does not imply that energy and utility sectors must be avoided entirely, but suggests a more rapid and sustainable transformation in these sectors. Meanwhile, other carbon storage and removal approaches (reducing food waste on farms and through distribution, soil carbon sequestration, protecting existing forests and wetlands, afforestation and deforestation, etc.) must be considered and applied to enable the world to reach the target, as well as to produce net-negative emissions in case there is any overshoot of 1.5°C. Carbon prices should be further integrated into security valuation models, as company's internal models tend to underestimate the price per ton of CO2 relative to a market price that increasingly includes the global social costs.4

      If there is a silver lining, it is that reports like this one from IPCC help keep awareness of climate change and its related impact top-of-mind, and force us to reckon with humanity's impact on the planet. An increased focus on these issues may influence positive global change, particularly in emerging markets where it can otherwise be tempting to rely on older energy models instead of a greater emphasis on renewables. In addition, the increased availability of user-friendly reports on impact metrics and shareholder engagement can make it more obvious to investors the impact their portfolio decisions can have.

      Bottom line: Calvert takes climate change seriously, given its potential effects on the planet, the inequitable impact on poorer people, and the necessity that companies change the way they think about and use energy. We find these issues financially material to many companies and our portfolios and engagement work reflects this.