Author
Tim Conly is head of responsible investment research at consulting firm JANA. |
I get asked this question every day – and my answer is always "yes".
At the beginning of 2020, Australia was living through the worst bushfires in recent history.
The fires placed an unprecedented spotlight on climate change and what we are doing about it.
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| Investors should consider hedging against climate change risk by targeting investments that benefit from the transition to a lower carbon economy. |
The financial risks associated with climate change have immediate implications for investment and will become more influential on strategy over time.
Understanding the extent of climate change’s impact means understanding what policy measures will likely be adopted to combat it, both in Australia and overseas.
Worldwide, major investment funds and companies are demanding tougher action and more climate change policy certainty.
There are two positions set out by the International Energy Agency that encompass a future reality at different ends of the climate change spectrum.
The “good scenario”, known as the Sustainable Development Scenario, envisages a world with an aggressive, globally co-ordinated policy response that meets the targets enshrined in the 2015 Paris Agreement.
From an investment point of view, its impact on short-term returns is low. It would be negative, but not necessarily significant – about 0.4 per cent per annum over the next 20 years.
The “bad scenario”, the Stated Policy Scenario, is founded on a basis that only commitments already in place or to be introduced soon by world governments come to fruition. This is where we are probably headed unless there is a drastic policy shift.
Under the “bad scenario”, the impact on financial investments until 2030 is minimal.
However, fast-forward to 2040 and they are far more severe. Why? By then, we expect the physical risks of climate change will be looming or already a reality. This will not only demand immediate action, but more extreme action, to address the unfolding and devastating climate impact.
Under both scenarios, there are winners and losers. The transition to a lower-emissions economy will affect regions, assets and sectors differently.
So what are the options for individual investors?
In JANA research, we classified "green" (lower emissions) and "brown" (emissions intensive) assets and how we anticipate that policy and technology developments will gradually shift the risk/return prospects in favour of "going green" over time.
Investors should consider hedging some of these risks and targeting investments that benefit from the transition to a lower-carbon economy.
Companies facilitating renewable energy or battery storage stand to reap the benefits of this transition. Property investments could focus on sustainable, energy efficient buildings, or even companies producing that efficient technology.
Of course, you always need to remain conscious of your investment requirements and objectives, as well as valuation, outlook and risks.
As climate change risks are not being efficiently priced by financial markets, not all "green" technology will be a winner. That's why active management of your investments remain important.
Most companies, fund managers and superannuation funds are now beginning to disclose how they consider and manage climate change risk. Investors should make themselves aware of these disclosures.
There is also a moral element to investment choices.
Sustainable practice is always best practice. The key to prosperity lies in continuously improving, supporting, encouraging and implementing sustainable practices.
Ensuring your exposure to climate change risk is assessed, monitored and addressed is the best way to drive profitable long-term outcomes.
Links
- (AU) Australian Banks ‘Undermining Paris Agreement’ With $7bn In Fossil Fuel Loans
- AustralianSuper exec warns 'climate laggards' will wither on ASX vine
- Government renewable energy investment program swamped by support
- Banking on gas will leave us stranded
- State government banking on coal exports as world chases Paris targets
- World Energy Model: Sustainable Development Scenario
- World Energy Model: Stated Policies Scenario
- The big banks are funding a huge problem
- Funding climate failure
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