Investors are alive to the risk climate change is posing to the economy, but many are probably underestimating its impact on their S&P/ASX 200 Index (Index:^AXJO) share portfolio.
I am not just talking about the obvious, like how floods and wild fires are hurting insurance shares.
There are two tectonic changes that are happening underfoot that haven't yet fully grabbed investors' attention.
How ASX 200 shares can be climate change losers
The first is the big shift in institutional fund flows. Australia's second largest super fund, Aware Super, will dump ASX shares that don't act on climate change, reported the Australian Financial Review.
Given it has nearly $150 billion in funds under management, such a move can devastate any ASX large cap.
This is especially so as other large institutional investors are probably doing the same or are thinking about it.
No matter how popular a ASX 200 share is, it cannot sustain longer-term outperformance without attracting fund managers.
Climate to change global financial systems
The second issue stems from potential government budget blowouts to deal with climate change. This market hazard is nicely explained in an AFR opinion piece by Chris Dickman from Altius Asset Management.
He warns of a period of twin deficits. The amount of government debt has ballooned due to the COVID-19 nightmare. But climate change is the second deficit as government's who do not do enough to address the risks risk being cut off from international financiers.
Sovereign debt blowout
This is perhaps a veiled barb at Australia. If we followed that argument to its natural conclusion, the cost for our government to borrow will rise materially while our dollar will slump. No one is predicting hyperinflation or stagflation for our economy, but the risks are there.
At least many ASX 200 shares are acting, such as our mining giants like the Fortescue Metals Group Limited (ASX: FMG) share price or BHP Group Ltd (ASX: BHP) share price. They should be applauded but there is a big element of self-preservation behind that decision.
An ASX 200 share that is already being left behind
If you want a current example of what happens when a ASX 200 company doesn't have a credible plan, look at the Aurizon Holdings Ltd (ASX: AZJ) share price.
The rail operator should be a hot share to buy in this climate. It is trading on a yield of around 10% (including its 70% franking credit) and analysts think this is sustainable in FY22, if not beyond.
Further, it owns infrastructure assets – something that investors crave. The takeover bids for Sydney Airport Holdings Pty Ltd (ASX: SYD) and Spark Infrastructure Group (ASX: SKI) says it all!
Ripe for reform
But most brokers are not recommending the Aurizon share price as a buy because of its over reliance on coal haulage. This is one big reason why its share price is lagging the market.
This isn't so bad if management can explain how it can reduce its exposure to the fossil fuel and grow (or at least maintain) earnings.
Until that day comes, Aurizon will probably be sidelined by most investors despite its tantalizing yield.
Having said that, I won't be surprised if investment bankers are lining up to sell a restructure proposal of sorts to its board.
