United Kingdom, Intermediaries

Time to position for climate change?

With many asset owners still unsure how to respond to climate change, Portfolio Manager Mahmoud El-Shaer explains how he applies science to incorporate climate risk mitigation into buy and maintain global credit approaches.

Views expressed are those of the author and are subject to change. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional or institutional investors only. Your capital may be at risk. Please refer to any investment risks noted at the end of the content.

CLIMATE CHANGE IS HERE, and it is already having a significant impact on our planet and the economy.

Consider:

  • 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…

To read more, please click the download link below.

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.

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