Decades of scientific evidence from the Intergovernmental Panel on Climate Change (IPCC) has detailed a significant transition is necessary to contain severe climate-related risks to food production, infrastructure, water supply, human security and economic growth. Without greater action in line with the goals of the Paris Agreement, average global temperature rises of around 4 degrees Celsius can be expected to result in an estimated $23 trillion of associated global economic losses over the next 80 years. This would harm all economies, asset classes and industries, whether directly or indirectly, with escalating consequences for all financial market actors.
Investors are exposed to two forms of climate risk: physical and transitional. Physical risks arising from climate change include worsening extreme weather events like droughts, heatwaves and floods, and their associated impacts, that cause more disruptions to businesses or assets. This includes worsening damage to physical assets like ports, roads and buildings, and more frequent disruption to production processes, markets and supply chains, among other examples. Transitional risks are financial impacts that could arise as climate change policies, changing technology costs and consumer preferences accelerate the deployment of zero-emissions technologies and restrict or penalise carbon-heavy activities, displacing emissions-intensive assets and seeing them lose value as a result. The Bank of International Settlements has declared the combined forces of these risks could lead to the next systemic financial crisis.
If left unchecked, these climate risks will threaten investors’ long-term ability to sustain value and generate ongoing returns for their beneficiaries over decades. But because of the scope and size of these climate risks to the global economy, researchers from Cambridge University have indicated climate change entails ‘unhedgeable’ risk for investment portfolios. That means action to cut emissions and avoid the worst impacts of climate change is the only real path to protect long-term investment value and returns. At the same time the necessary transition to net-zero emissions will create significant new investment opportunities that can create future jobs, wealth and growth for investors, businesses and communities. The OECD estimates that $6.9 trillion in investment will be required across energy, transport, building and water infrastructure each year to 2030 to meet the world’s climate and development objectives. Others have found $460 billion a year more will need to be invested out to 2030 to decarbonise the global energy system in line with limiting global warming at 1.5 degrees Celsius.
STEWARDSHIP AND ENGAGEMENT
Investors are increasingly recognising their exposure to climate risks and their fiduciary duty to respond. While investors can redirect their investment decisions to favour companies and projects that will accelerate the necessary clean technology translation, they also have a powerful opportunity to affect behaviour change, diversification and transformation among the most carbon-intensive companies through their equity and fixed-income holdings. This is possible through investment stewardship – including direct engagement with public companies to achieve corporate practice consistent with long-term value protection and creation.
Climate Action 100+ is the largest ever investor engagement initiative on climate change and is putting this stewardship into practice. By working together through Climate Action 100+, investors can accelerate the business transition to a net-zero emissions future and in turn help secure stable economies that are more resilient to the risks posed by climate change.