Friday Highlight  

Ignore climate change at your peril

Ignore climate change at your peril

Sustainable investment continues to be in demand.

A recent study by HSBC Global Asset Management, surveying 204 UK IFAs, discovered that interest in social concerns, such as diversity, human rights, consumer protection, and animal welfare is the main reason for client demand for investments explicitly incorporating ESG issues. 

However, 34 per cent IFAs said that the single main reason impacting client demand for ESG products can be attributed to a limited understanding of ESG issues, including a non-factual view of the impact to long-term investment portfolios. 

IFAs therefore play a key role in helping investors look at the bigger picture and consider other investment risks relating to sustainability, such as climate change. Ensuring investors understand not only the investments they are making but also the wider issues impacting those investments, is key to retaining interest and engagement. 

For example, being proactive can help investors mitigate the risks associated with climate change, estimated at a loss of return of 0.82 per cent per year for developed equities. Carbon footprint analysis is one tool for understanding climate risk – but what do investors need to know to help them adopt this to support their investment decisions and what’s next? 

1. Why does climate change matter? 

Climate change represents an urgent threat to corporations, economies, society and the planet. In December 2015, over 190 countries agreed to take immediate action with the Paris Agreement, an international commitment to stay within 2 degrees C of warming above pre-industrial levels.

This goal necessitates the transition to a lower-carbon economy. The transition is already underway and set to accelerate as changes in policy and regulation, the falling cost of technology and demand are leading to fundamental shifts in sectors such as energy, auto and utilities.

Our current trajectory is closer to 4 degrees C above pre-industrial levels by 2100 if no action is taken. The physical impacts of climate change associated with this temperature increase are severe – in both social and economic terms.

The financial consequences of these physical changes are no less severe. An Economist Intelligence Unit report calculates the value at risk to global manageable assets from climate change to be $US 4.2trn, in present value terms. In many cases, regional impacts can be more pronounced.

2. What are climate-related risks?

A report by the Financial Stability Board (FSB) backed Taskforce on Climate-related Financial Disclosures (TCFD) classified climate-related risks into two major categories – physical risks and transition risks.

Transition risks relate to the impacts and costs of policy, legal, technology and market changes that will be required to mitigate and adapt to climate change. In concrete terms this will result in a higher carbon price associated with carbon emissions. 

Physical risks relate to the physical impacts of climate change. These include an increase in the frequency and severity of extreme weather events, such as droughts, floods, storms, or longer-term changes in climate patterns, such as rainfall and temperature.