“Climate change is increasingly a risk that investors cannot afford to ignore,” writes Richard Turnill, BlackRock’s global chief investment strategist, in a recent commentary, noting that those potential losses “are not baked in” current market prices.
If no counter action is taken, such as reducing fossil fuel use, close to 60% of U.S. metro areas will lose 1% of more of gross domestic product, which will not be offset by comparable growth in other metro areas.
Turnill focused on potential losses in municipal bonds — where a rising share of issuance comes from regions facing climate-related losses — commercial mortgage-backed securities (CMBS) that support properties vulnerable to Category 4 or 5 hurricanes and the stocks of U.S. utilities operating in danger zones.
The New S&P 500 ESG Index
The new S&P 500 ESG Index takes a broader approach to U.S. stocks at risk from climate change and from other environmental, social and governance issues. Its purpose is not to outperform the S&P 500, however, but to more closely align with the investment objectives and personal values of investors concerned about climate change and other ESG-related issues.
Its risk/return profile is similar to that of the S&P 500, but the index excludes companies that place in the bottom 25% of their industry group’s market cap and those that don’t operate in line with ESG principles. More specifically, it excludes companies that:
- derive more than 10% of their revenue from tobacco-related products or services
- are involved in controversial weapons including cluster bombs, landmines and biological weapons and nuclear weapons
- score in the bottom 5% for compliance with UN Global Compact, which supports businesses whose practices favor the environment, human rights, labor and anti-corruption.
- score in the bottom 25% of ESG scores within their GICS industry group
As a result, the S&P 500 ESG index, developed by S&P Dow Jones Indices, includes just 333 stocks compared with 505 (not a typo) in the S&P 500, and excludes such companies as Boeing and General Dynamics (for weapons), Philip Morris and Altria (for tobacco) and Occidental Petroleum and Marathon Oil (low ESG score).
It also excludes the two share classes of Google (Shares A and C) for their low ESG scores as well as Berkshire Hathaway B shares and Netflix shares due to the companies’ low level of compliance with the UN Global Compact.