Climate Change, no longer moving at a glacial pace for investments
The recent IPCC report has confirmed that the world is warming at a pace that is outrunning the rate of change required, with potentially catastrophic consequences. Research from a variety of credible sources overwhelmingly suggests that investors need to think about how their portfolios will be affected by climate change and take action address these risks immediately. If not sooner!
From a macro perspective, climate change is creating both opportunities and risks for investors.
Because of the global publicity given to activists like Greta Thunberg retail investors are increasingly aware of climate change as an issue for humanity and some are now wondering how climate change is affecting the economy and investment returns. The short answer is that it's not just one thing. Climate change is impact all aspects of our lives, from our health and food security to even our ability to work or travel safely. In addition, there are many ways in which climate change poses risks for businesses--and investors, of all sizes, are now absolutely required to be aware of these risks as they make decisions about their portfolios.
The transition to a low-carbon economy will mean less demand for fossil fuels and related infrastructure
One of the biggest impacts of climate change is on the economy. As temperatures rise, there will be less demand for fossil fuels and related infrastructure (such as pipelines). Meanwhile, there will be more demand for renewable energy sources like wind turbines and solar panels.
The United States’ renewable energy sector, already the second largest in the world, is poised for strong growth. Bolstered by growing demand for clean energy, falling costs, and robust incentives, renewable energy is expected to become the leading source of electricity generation by the mid-2030s. By 2050, renewable energy sources are projected to provide 42 percent of the United States’ electricity compared to approximately 20 percent today. 1 Given the pace and scale of the transformation underway, the U.S. renewable market offers a valuable opportunity for investors.
Focusing on the five largest sources of renewable electricity generation—hydroelectric, wind, biomass, solar and geothermal—this paper provides information on historical trends in power generation in the United States, forecasted changes in the U.S. electricity market and their key drivers, namely declining construction costs and government incentives, and the implications for foreign direct investment (FDI) in the United States. Investors interested in the opportunities present in the United States’ renewable energy sector are invited to contact SelectUSA, the United States’ investment promotion initiative housed in the U.S. Department of Commerce, by emailing selectusa@trade.gov or by visiting the SelectUSA website.
THE U.S. RENEWABLE ENERGY SECTOR HAS ALREADY SEEN STRONG GROWTH Over the past decade, renewable energy sources (renewables) have become an increasingly important part of the United States’ energy mix. Between 2000 and 2020, overall renewable energy generation grew 91.2 percent, from 6.1 quadrillion British thermal units to 11.6. of energy. In 2020, about 12.2 percent of total primary U.S. energy production was generated by renewable sources. 2 Renewable energy generation in the electricity sector has also seen impressive growth. Between 2000 and 2020, utility-scale electricity generation by renewablesin the United States grew approximately 120 percent, from 356 billion kilowatt-hours (kWh) in 2000 to 783 billion kWh in 2020. In 2020, renewables generated 19.5 percent of the United States’ net electricity production. 3 In comparison, coal plants 1
Climate change will impact asset prices and the availability of commodities
Climate change will affect the availability of commodities and energy resources. The World Bank estimates that by 2050, climate change could reduce global GDP by up to 2%. This is because of reduced productivity in agriculture, water supply and sanitation, human health, ecosystem services (like pollination), tourism and coastal ecosystems.
Climate change will also impact asset prices. For example:
Rising sea levels will impact real estate values in low-lying areas such as Florida or Bangladesh; Rarely two locations used in the same sentence to outline common problems.
More intense storms are damaging infrastructure such as roads or bridges; In 2019 New Scientist opined that Climate change may see one in four US steel bridges collapse by 2040
Heat waves cause electricity demand to spike during peak hours - which could lead to blackouts unless additional capacity is built out in advance, as the UK Government seemed to be forewarning the public about as recently as the winter of 2022.
Climate change will also impact other key economic variables, such as labor productivity and migration patterns.
Some opportunities may be limited by policy or regulation
While the Paris Agreement was signed by 195 countries in 2015, it took a further 12 months for it to be ratified and come into force. The agreement sets a target of limiting global warming to well below 2 degrees Celsius and pursuing efforts to limit the temperature increase even further, to 1.5 degrees Celsius above pre-industrial levels. However, with record breaking temperatures in the past decade amount to a 2 degree increase since 1880, meaning the clock for effective action is ticking.
The targets set by this global climate change policy can be impacted by regulation at local, state and federal levels as well as private sector investment decisions such as how much financing is provided to fossil fuel companies.
But the path to a cleaner, more environmentally balanced planet has seen resistance at legislator level in the USA where at least 49 anti-ESG bills have been introduced across the country this year, according to a February 8 report from law firm Ropes & Gray, while about 22 were introduced in 2022.
US Republicans hoping to quash environmental, social and governance investing in state capitols are running into opposition from influential local banks, jeopardising their efforts to blacklist financial institutions accused of disadvantaging oil and gas companies.
Investors across asset classes are beginning to factor in climate change into their investment decisions
While it may be true that the financial community has long been skeptical of the potential for climate change and other environmental risks, there's now growing evidence that this skepticism is outdated with momentum being driven by high profile activists such as Greta Thunberg, Stop Oil and the wider public.
Investors are beginning to factor in climate change into their investment decisions because it can help them achieve better returns supported by awareness campaigns like Make My Money Matter from the creative brain of Film Director Richard Curtis and partners who have gone from ‘curiosities’ to key speakers at COP, G7, RAO Global events and other major forum’s where you would ordinarily, least expect to find this highly successful Movie Maker.
It is broadly accepted that including climate change as a risk factor can also reduce portfolio volatility by diversifying assets across sectors and regions, helping investors minimize risk while maximizing returns over time
investors are beginning to recognize that climate change is a financial risk that affects all asset classes, including stocks, bonds, real estate and commodities. This means that investors need to know how exposure to climate change factors into their portfolios.
Active Asset managers are thinking about how they can help companies understand the risks and opportunities posed by climate change.
It is increasingly difficult for companies to ignore climate change-related risks. For example, many businesses are exposed to regulatory changes that could significantly impact their bottom line (e.g., through carbon pricing or bans on diesel vehicles). Companies need a good understanding of what these changes might mean for them so they can plan ahead accordingly.
Asset managers must also understand how their clients' business models fit into a low-carbon economy--and what strategies those clients have in place to adapt over time.
Investors need to pay attention to governance, transparency, regulation and fines when it comes to climate change.
Investors need to pay attention to governance, transparency, regulation and fines when it comes to climate change.
Governance: How can investors ensure that companies are managing climate risk? This is a critical question for all asset owners as it relates to their fiduciary duty to manage investments prudently. Investors should ask themselves how they can better understand the risks associated with climate change, including their portfolio's exposure and how it compares with peers in terms of risk management practices or disclosures around the topic.
Transparency: What is the best way for investors--including institutional investors such as pension funds and endowments--to assess this issue? How do we know if companies are disclosing enough information about their exposure? Transparency has been identified as one of three key areas where investors need more guidance on how best practice looks like when dealing with these issues (alongside governance).
Regulation: How can investors ensure that companies are managing climate risk? This is a critical question for all asset owners as it relates to their fiduciary duty to manage investments prudently. Investors should ask themselves how they can better understand the risks associated with climate change, including their portfolio's exposure and how it compares with peers in terms of risk management practices or disclosures around the topic.
Climate change holds both risks and opportunities for investors
Climate change is a global problem that will have a significant impact on asset prices. The world's leading scientists agree that climate change will have an impact on supply and demand of commodities, fossil fuels and other natural resources.
As investors, we need to understand how our portfolios may be affected by climate change as well as manage risks associated with it effectively.
Conclusion
In conclusion, climate change is one of the biggest challenges facing investors today. It presents both risks and opportunities for investors, and it's important that they understand how their portfolios will be affected by these changes.
