Not all investors accept that climate change is taking place or that it might affect their portfolios. Some investors acknowledge that carbon-intensive assets are likely to suffer permanent value destruction, but have not acted because they think the risks are too remote. These risks might seem even more remote today amid President-elect Donald Trump's commitment to the exploitation of fossil fuels to foster economic growth and his suggestion the U.S. will withdraw from the 2015 Paris Agreement, the legally binding global climate pact.
Mr. Trump's position is potentially problematic for investors who integrate environmental, social and governance considerations into their decision-making processes; their great fear, however committed they are to responsible investing, is underperformance vs. broad market indexes. Asset managers divesting from stocks with high carbon footprints run the risk of underperforming their benchmark for as long as climate mitigation policies are postponed and market expectations about their introduction remain low. These asset managers, as well as those who follow low-carbon strategies, could be wiped out long before serious limits on carbon emissions are introduced.
If the U.S.' new economic path leads to a pullback in environmental regulation and a shift in capital to high-carbon industries, underperformance of green and low-carbon funds may become more likely, at least in the short to medium term.