The Price of Climate Change

Climate change and its risks are going mainstream. What does the raft of new rules to curb carbon emissions mean for investing? How do you reduce climate risk in portfolios? We debated this with colleagues, clients and industry representatives during a one-day global videoconference in September. Our key conclusions:

• You may or may not believe man-made climate change is real or dismiss the science behind it. No matter. Climate change risk has arrived as an investment issue. Governments are setting targets to curb greenhouse gas emissions. This may pave the way for policy shifts that we could see ripple across industries. The resulting regulatory risks are becoming key drivers of investment returns.
• The momentum behind mitigating climate risk in portfolios appears to be building. Long-term asset owners worry about extreme loss of capital and/or ‘stranded’ assets (holdings that need to be written down before the end of their expected life span). Do securities of companies most susceptible to physical and regulatory climate risks already trade at a discount to the market? We have not observed such a discount in the past – but could see one in the future.
• Global insurers have led the way in pricing natural disaster risks. A huge US storm in 1992 (Hurricane Andrew) almost wiped out the industry, leading to a revolution in how it underwrites risks through an influx of capital, use of big data and increased capital requirements. Other industries may need to catch up.
• We discuss ways for asset owners to promote sustainability, including a focus on environmental, social and governance (ESG) factors. This is not just about saving the planet or feeling good. We view ESG excellence as a mark of operational and management quality. It means responsiveness to evolving market trends, resilience to regulatory risk, and more engaged and productive employees.

Read Full Article