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CLIMATE CHANGE IS HERE, and it is already having a significant impact on our planet and the economy.
- Since this July, 1.9 million hectares (ha) have been burnt by wildfires in New South Wales, Australia, including 800,000 ha in national parks1.
- Globally, 18 of the 19 warmest years on record have occurred since 20002.
- In 2017 and 2018 alone, 30 weather and climate disasters, each costing over US$1 billion, hit the US3.
- In total, these hurricanes, wildfires, droughts and tornadoes cost a record-breaking US$397 billion4.
- Last year, BASF (a European chemicals manufacturer) had to shut down one of its plants and suffered a €250 million hit on operating income as a direct result of low levels of water in the Rhine River, a main shipping route5.
We feel investors are not best placed to assess the impact a two-degree increase in global temperatures may have on capital markets. In our view, the problem is that climate change will undoubtedly have far-reaching implications for investors, particularly those who buy assets and hold them for long periods. Yet there are so many imponderables that some investors find it hard to know how to position portfolios to guard against climate risk.
Why climate change matters for investments
Climate change is already affecting markets in two main ways: through the growing number and cost of extreme weather events; and through the societal and regulatory pressures driving companies’ and consumers’ actions.
Climate change has been high up on policymakers’ agendas for some years. For example, the European Commission’s Sustainable Finance Action Plan makes climate risk a top priority. Since 2008, over 1,000 regulatory acts on climate have been passed globally6. More recently, companies have become proactive in disclosing their approaches to mitigating and adapting for climate risk.
Crucially, addressing questions on sustainability has become a focus for long-term investors as they look to generate returns while being aware of tail risks. Taking a multi-decade view, we expect that…
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1The Guardian | 2NASA | 3US National Oceanic and Atmospheric Administration | 4Ibid. | 5CEN, Reuters | 6Climate Change Laws of the World database, 2018; Grantham Research Institute on Climate Change and the Environment; Sabin Center for Climate Change Law. As of 31 December 2018.