09/07/2020

(AU) Why It Will Pay For Investors To Go Green

Sydney Morning Herald - Tim Conly

Author
Tim Conly is head of responsible investment research at consulting firm JANA.
Should I make green investments a consideration for my investment portfolio?

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.

Investors should consider hedging against climate change risk by targeting investments that benefit from the transition to a lower carbon economy.

It was a timely reminder that investors should ensure that their exposure to climate change risk is assessed, monitored, understood and addressed in their portfolios.
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.

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Climate Explained: What The World Was Like The Last Time Carbon Dioxide Levels Were At 400ppm

The Conversation - 

Gil.K/Shutterstock 

Author

 Professor Jamie Shulmeister is Head of the School of Earth and Environment at the University of Canterbury, Christchurch NZ.
He is a geomorphologist and Quaternary Scientist who specialises in the long-term climate history of the Australasian region.
The last time global carbon dioxide levels were consistently at or above 400 parts per million (ppm) was around four million years ago during a geological period known as the Pliocene Era (between 5.3 million and 2.6 million years ago). The world was about 3℃ warmer and sea levels were higher than today.

We know how much carbon dioxide the atmosphere contained in the past by studying ice cores from Greenland and Antarctica. As compacted snow gradually changes to ice, it traps air in bubbles that contain samples of the atmosphere at the time. We can sample ice cores to reconstruct past concentrations of carbon dioxide, but this record only takes us back about a million years.

Beyond a million years, we don’t have any direct measurements of the composition of ancient atmospheres, but we can use several methods to estimate past levels of carbon dioxide. One method uses the relationship between plant pores, known as stomata, that regulate gas exchange in and out of the plant. The density of these stomata is related to atmospheric carbon dioxide, and fossil plants are a good indicator of concentrations in the past.

Another technique is to examine sediment cores from the ocean floor. The sediments build up year after year as the bodies and shells of dead plankton and other organisms rain down on the seafloor. We can use isotopes (chemically identical atoms that differ only in atomic weight) of boron taken from the shells of the dead plankton to reconstruct changes in the acidity of seawater. From this we can work out the level of carbon dioxide in the ocean.

The data from four-million-year-old sediments suggest that carbon dioxide was at 400ppm back then.

Sea levels and changes in Antarctica

During colder periods in Earth’s history, ice caps and glaciers grow and sea levels drop. In the recent geological past, during the most recent ice age about 20,000 years ago, sea levels were at least 120 metres lower than they are today.

Recent research shows that west Antarctica is now melting. Elaine Hood/NSF

Sea-level changes are calculated from changes in isotopes of oxygen in the shells of marine organisms. For the Pliocene Era, research shows the sea-level change between cooler and warmer periods was around 30-40 metres and sea level was higher than today. Also during the Pliocene, we know the West Antarctic Ice Sheet was significantly smaller and global average temperatures were about 3℃ warmer than today. Summer temperatures in high northern latitudes were up to 14℃ warmer.

This may seem like a lot but modern observations show strong polar amplification of warming: a 1℃ increase at the equator may raise temperatures at the poles by 6-7℃. It is one of the reasons why Arctic sea ice is disappearing.

Impacts in New Zealand and Australasia

In the Australasian region, there was no Great Barrier Reef, but there may have been smaller reefs along the northeast coast of Australia. For New Zealand, the partial melting of the West Antarctic Ice Sheet is probably the most critical point.

One of the key features of New Zealand’s current climate is that Antarctica is cut off from global circulation during the winter because of the big temperature contrast between Antarctica and the Southern Ocean. When it comes back into circulation in springtime, New Zealand gets strong storms. Stormier winters and significantly warmer summers were likely in the mid-Pliocene because of a weaker polar vortex and a warmer Antarctica.

It will take more than a few years or decades of carbon dioxide concentrations at 400ppm to trigger a significant shrinking of the West Antarctic Ice Sheet. But recent studies show that West Antarctica is already melting.

Sea-level rise from a partial melting of West Antarctica could easily exceed a metre or more by 2100. In fact, if the whole of the West Antarctic melted it could raise sea levels by about 3.5 metres. Even smaller increases raise the risk of flooding in low-lying cities including Auckland, Christchurch and Wellington.

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