What the United Nations climate change report means for investors
Ice caps are melting at an accelerating rate, and ocean temperatures are warming faster, with extreme weather leading to great risk exposures in real estate
This week, the Intergovernmental Panel on Climate Change (IPCC) released their newest report, with 100 scientists from more than 30 countries assessing the latest scientific knowledge (over 7,000 publications) about the physical science basis and impacts of climate change on ocean, coastal, polar and mountain ecosystems, and the human communities that depend on them.
The report found our polar ice caps to be melting at an accelerating rate, ocean temperatures warming faster than expected, and, with emissions held at their current level (emissions are still rising globally), 680 million people globally would be displaced.
This underscores the prominence of climate change risk management issue and the urgent need for all constituents to come together now.
On the policy side, at the United Nations Climate Action Summit, there was new action to announce: 65 countries and 10 regions, 102 cities, 93 businesses, and 12 investors all announced a commitment to net zero CO2 emissions by 2050. But activists, scientists, and our youth alike lamented the conservative 2050 timeline and lack of urgency by the world’s largest governments.
Furthermore, the years following the Paris Agreement have told us about how commitments are one thing, action is another. According to research carried out by the Climate Action Tracker, the world is not on track to reach already pledged emissions targets. If governments do achieve the emission cuts to which they have committed, warming is still likely to rise to 2.9°C, double the Paris agreement. Estimates predict that under current policies the world will already exceed 1.5°C of warming around 2035.
Investors have a critical role to play.
The need to understand and quantify exposure to both physical and transition related risks is paramount. On the physical side, some risks are no longer 30 or 50 years risks.
On physical risk, with rising temperature and frequency in extreme weather events there is growing scrutiny on risk exposures in real estate and infrastructure to wild fires, flooding or hurricanes.
Risks such as water scarcity will have a huge impact on sectors such as agriculture, textile and consumer staples.
Loss of biodiversity is a key climate physical risk for the pharmaceutical industry. Potential impact on public health and the overall healthcare system as a result of the heatwaves are real and near to medium-terms risks that investors should start to focus on.
But it’s not all bad news.
A report published by the Global Center on Adaptation found that investing US$1.8 trillion globally from 2020 to 2023 in adaptation efforts could generate US$7.1 trillion in total net benefits.
On the transition side, as policy makers and regulators begin to introduce new fiscal measures such as carbon tax or other market incentives, investors should develop a comprehensive view on how the different industry sectors will be impacted by the transition to a lower carbon economy. and how.
As a start, to assess risks, there are useful investment and risk tools such as the Paris Agreement Capital Transition Assessment (PACTA) for portfolio’s scenario alignment.
However existing tools are mostly limited to analyzing five to eight sectors given their high greenhouse gas (GHG) emissions. This requires research looking at the direct impact on the business models as well as indirect impacts on the supply chain.
For example, the shift to renewable power generation such as wind farms not only presents an opportunity for utilities companies, but also semiconductor companies that own the IP and technology for the chip needed in every wind turbine power plant.
It is also important to be able to distinguish between companies that are adapting and changing to a more carbon efficient business model versus the laggards - this is especially so in the high GHG emitting sectors including such as energy and transportation.
Unquestionably climate change risks are tangible and near-term, requiring action and engagement from investors, however climate change is also creating or accelerating a range of significant investment opportunities to explore.
Jennifer Wu is global head of sustainable investing for J.P. Morgan Asset Management.
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