Carbon Bubble Fuels Interest in Socially Conscious Investing

by on Mar 12, 2014

Months after United Nations climate chief Christina Figueres greeninvesting warned the global investing community over a potential “carbon bubble,” members of the UK’s parliament have echoed her calls for action. The so-called carbon bubble is in many ways a function of the 2010 Cancun Agreements, in which UN member states made a non-binding pledge to prevent global warming passing the 2°C threshold. The scientific community has since warned that this “2°C goal” can only be achieved if no more than one-quarter of the world’s current coal, oil and gas reserves are burned – in other words, two thirds of the global fossil fuel reserves must stay in the ground.

Distribution of Fossil Fuel Reserves Between Stock Exchanges
Source: Carbon Tracker Initiative & Grantham Institute
Based on these figures, the Carbon Tracker Initiative estimates that the value of the largest energy companies could be diminished by 40 to 60 percent largely due to an over-investment in exploring untapped fossil fuel reserves. While these figures are bleak, it’s important that we apply proper context. The carbon bubble theory relies on the assumption that the international community is truly committed to the 2°C goal. Until countries enter a legally binding agreement (which is hard to envision given the recent UN Climate Talks in Warsaw), I personally advocate treating the global commitment to the 2°C goal – and thus the carbon bubble – with a heavy dose of skepticism.

Promoting Socially Conscious Investment
Regardless of the legitimacy of the carbon bubble threat, forward-thinking firms should consider promoting articles on socially conscious and sustainable investment options. As media attention on both global warming and the carbon bubble increases, brokerage firms and advisors can expect to receive more questions related to sustainable investments and green energy funds. We first identified the practice of promoting these materials in an August 2013 post which discussed the new sustainable investment resources offered on the Merrill Lynch Wealth Management website. More recently, Morgan Stanley announced the launch of itsSustainable Investing Challenge, a competition for students to propose “institutional-quality investment vehicles that seek positive environmental or social impact and competitive financial returns.”

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Millennial Impact
Younger clients in particular may be interested in information on this topic. It has been well documented that the Millennial generation exercises social consciousness when making purchasing decisions. While this does not necessarily mean that green investment products will be more popular with younger clients (after all, purchasing a pair of TOMS shoes and deciding how to invest assets for profit are far from analogous), it’s likely this information-hungry generation will at least want to research their options. Firms that make a point of emphasizing content on these topics may be able to satisfy a young investor’s socially conscious perspective and also improve their overall brand image.