Investing In A Changing Climate

By Eva Cairns, ESG Investment Analyst, Aberdeen Standard Investments

The effects of climate change are impossible to ignore. Reports of record temperatures hit the news on a regular basis. Extreme weather events – such as storms, wildfires and floods – occur with ever greater frequency. The melting of ice sheets is clearly visible.

As the world’s population grows, demand for energy, greenhouse gas emissions and temperatures continue to rise. The scale of the climate change challenge is immense, the urgency to act unprecedented.

Most countries accept that burning fossil fuels is a major contributing factor to rising temperatures. More than 180 committed to the goals of the ‘Paris agreement’ in 2015 – keeping global warming within 2°C, and ideally within 1.5°C, from pre-industrial times. However, progress has been slow and greenhouse gas emissions hit a new high in 2018.

Last year, the Intergovernmental Panel on Climate Change published its ‘Special Report on Global Warming of 1.5°C’. This paper warned of the environmental, social and economic damage we can expect if governments don’t take more ambitious action to reach the goals set in Paris.

Limiting the consequences of global warming is one of the most significant challenges of our times. Climate change poses a potentially existential threat. However, a warmer planet also affects the risk profile for many of the companies and economies in which we invest.

Companies and economies will likely incur major costs during the global transition to low-carbon energy sources. In addition, there will be significant costs from increasing physical damage linked to climate change, and investment in adaptation measures to limit this damage in the long run.

Investors – asset owners and fund managers – need to understand how these changes will affect the value of their investments. Assessing the risks and opportunities of climate change should form a core component of investment research, as well as environmental, social and governance (ESG) integration.

This involves gaining an in-depth understanding of how each company is exposed to material issues related to climate change, and what these companies plan to do to tackle these challenges. Businesses need to be open to change and become more resilient, amid rapid developments in climate policies, public perception and technological advances.

That said, there are opportunities as well. The transition to a low-carbon economy will require large amounts of private capital to construct renewable energy infrastructure, low-carbon transport and improve energy efficiency.

Massive investment – in flood walls, cooling technology, water and soil management – will be needed to adapt to the physical effects of higher temperatures. How much exactly will be determined by the pace of the transition to low-carbon energy. Not enough progress now will incur higher costs later.

Asset owners and fund managers will play a critical role by allocating all this capital. The attached report seeks to examine these issues in more detail.

Part I looks at the evidence for climate change, the damage caused by rising temperatures and the biggest climate culprits.

Part II examines what this means for investing, explains the risks and opportunities associated with the transition to low-carbon energy sources, as well as the risks and opportunities linked to the physical impacts of warmer temperatures.

Part III offers practical advice on what fund managers can do to better understand the material risks to existing and potential investments, as well as their role in tackling the biggest challenge of our lifetimes.

Separately, a digging deeper section takes a more in-depth look at hydrogen – why it may be a viable clean energy source, and what challenges need to be overcome to make this happen.

Disclosures:

The views and conclusions expressed in this communication are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any specific security.

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