OBSERVATIONS | A WARMING WORLD - DISRUPTION, RISK AND OPPORTUNITY
Climate change is a pressing challenge and the need for mitigation is immediate. The COVID-19 crisis has shone a spotlight on the interdependence of the economy, society and the environment, and put the value of sustainability into greater focus than ever before.
As governments and businesses grapple with the reality of our changing climate, there will be a range of risks and opportunities that investors need to navigate. In this article, we discuss the key climate-related risks, how these are likely to affect asset prices, and the opportunities available to investors as the world shifts to a low-carbon economy.
- Limiting global warming will require far-reaching and unprecedented changes in all aspects of society- To avoid many of the adverse impacts of climate change, the United Nations has warned that the world needs to limit global warming to below 1.5C above pre-industrial levels. However, scientists say that keeping to this target will require “rapid, far-reaching and unprecedented changes in all aspects of society.”
- A staggering scale of potential losses - The value of global financial assets at risk from climate change has been estimated at USD 2.5 trillion by the London School of Economics and USD 4.2 trillion by The Economist. The financial impact of climate change is complex, but climate-related risks are generally described as falling into two broad categories—physical risks and transition risks. Physical risks are direct risks of climate change resulting from extreme weather, more frequent droughts or higher sea levels. Transition risks are those associated with the impacts of extensive policy, legal, technology and market changes that may arise in the transition to a low-carbon economy.
- A dramatic shift in attitude - In Australia, there has been a dramatic shift in attitude as our financial regulators increasingly reinforce the message that investors should consider the materiality of climate-related risks and manage them accordingly. With climate risks being distinctly financial in nature, they say that many of those risks are foreseeable, material and actionable now.
- But where there’s risk there’s also opportunity - The inevitable change associated with the transition to a low-carbon economy also presents opportunities for companies and investors. The beneficiaries of the transition to a low-carbon economy are wide-ranging. They include renewables and sustainable transportation, as well as resource efficiencies and waste and water management, to name a few. Gaining exposure to these opportunities has never been easier, with access available across asset classes, via fund structures or individual securities. And as this area develops, the data increasingly shows that incorporating environmental, social and governance factors into investing can improve long-term risk-adjusted returns for equities and preserve returns in bonds.