Views on improving the integrity of global capital markets
23 September 2020

CFA Institute Weighs in on Including Climate Change Analysis in the Investment Process

Many believe that climate change will have a profound and in some cases deleterious effect on economies and markets in the coming decades. Analysts and portfolio managers currently are assessing what may provide the best ways to incorporate analysis of climate change into their investment process.

The CFA Institute report, Climate Change Analysis in the Investment Process, educates investors about the basics of climate change and helps them understand the associated economic and market impacts. The report focuses on the physical and transition risks climate change is projected to create; explains to investors carbon markets; and reviews the resources available for investors looking for the best climate change integration tools. 

A key piece of the report is a survey of CFA Institute members’ perspectives on climate change, in which nearly 75 percent of members in global C-level investment industry positions believe climate change is an important issue. Risk assessment is the main reason firms include climate analysis in the investment process, followed by increasing client demand. At the same time, just under 40 percent currently incorporate climate change information into their investment processes. For those firms that do not include climate change analysis in the investment process, a lack of measurement tools is the main reason given.  

To help investors better understand the “how” of climate integration, CFA Institute partnered with 10 international firms to produce case studies focused on climate change integration in analysis. These case studies cover a diverse set of investment themes, including carbon markets, climate integration at the portfolio level, quantitative analysis, engagement around climate issues, how a ratings agency uses climate change analysis, and forestry as an asset.  

Most important, the report includes recommendations CFA Institute makes to investors, issuers, and policymakers on how to better integrate climate change analyses into what they do, such as the following:

  • A price on carbon: To underpin robust and reliable carbon pricing, CFA Institute calls on policymakers to ensure that regulatory frameworks for carbon markets are designed to deliver transparency, liquidity, ease of access for global market participants, and similar standards across jurisdictions.
  • Carbon price expectations included in analyst reports: CFA Institute recommends that investment professionals account for carbon prices and their expectations thereof in climate risk analysis.
  • Increased transparency and disclosure on climate metrics: CFA Institute recognizes the coalescing of the investment industry around the Sustainability Accounting Standards Board (SASB) and Task Force on Climate-related Financial Disclosures (TCFD) standards for climate-related disclosures, which are the most relevant and succinct climate-related disclosure standards that address the materiality of climate-related risks.
  • Engagement with companies on physical and transition risks of climate change: CFA Institute suggests that investors should engage with issuers to ensure that climate data, scenario analysis, and related disclosures are sufficiently thorough to support robust climate risk analysis in the investment process.
  • Education within the investment management profession: Investors need to continue to educate themselves about climate change to provide the climate-related analyses clients require.
  • Policymaker involvement: Investors need to continue to urge policymakers to craft regulations to ensure that investors have the tools they need to do the work of finance.

The investment profession needs to incorporate the risks of climate change into financial analysis to efficiently manage portfolio risks and opportunities. With this research, we hope to educate stakeholders and advance the debate on climate change in our industry.

Photo Credit @ Getty Images / sarayut Thaneerat

About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, is a senior director of capital markets policy at CFA Institute, where he focuses on corporate governance, ESG, and climate change analysis. He writes and speaks frequently on these topics on behalf of CFA Institute. His paper, Climate Change Analysis in the Investment Process was named “Best ESG Paper” by Savvy Investor in 2021.

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