Climate change has become such an integral part of finance when it comes to the growth of environmental, social, and governance (ESG) as an investment alternative, but now it might even make its way into regulatory measures for banking, such as stress tests.
Stress tests with respect to banks is of profound importance, especially when it comes to surviving a financial crisis. The financial crisis in 2008 was a reminder that banks need to be well-funded to blunt the impact of another catastrophic financial event, but now climate change could be a part of that.
“European regulators are considering whether to make potential losses from climate change a regular part of bank stress tests, an approach that could weigh on the dividends lenders pay to investors, according to people familiar with the matter,” a Bloomberg report noted.
“The European Banking Authority’s board of supervisors kicked off discussions this month on how to incorporate climate risks in the tests that take place every two years, said the people, who asked to remain anonymous,” the article added.
If climate change does become a part of banks’ stress tests, it could create a growth effect for investment opportunities in reducing carbon emissions. Banks may enlist the aid of industry leaders that can help them meet this goal.
An Active ETF Opportunity in Reducing Global Emissions
This opens up a growth opportunity for the actively managed KraneShares Global Carbon Transformation ETF (KGHG). Active management allows for dynamic market exposure, allowing for changes when market conditions warrant an adjustment.
Overall, KGHG seeks to capture the true potential within the carbon transition by focusing on companies from within industries that are traditionally some of the highest emission offenders but are on the precipice of transitioning to renewable technologies. These companies that are set to disrupt their industries would benefit greatly from being leaders in the transition, as the cost of carbon emissions will only become more expensive, cutting into the bottom line as demand decreases for high emissions offenders.
The fund utilizes proprietary, fundamental, bottom-up analysis using information disclosed by companies and third-party data. That fundamental approach to investing allows the fund to emphasize quality in its portfolio construction, which is necessary to help mute the volatility that the stock market is currently experiencing in 2022.
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