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Don’t let climate change melt away your investments

From floods in Thailand and droughts in Australia to fires in California, United States and drying rivers in Europe, the impacts of climate change are increasingly visible. Along with affecting everyday life, events such as these that result from climate change may affect investments significantly.

Don’t let climate change melt away your investments

Melting ice in East Antarctica. While it might seem like the impact of climate change may only affect investments decades in the future, the reality is that companies are already being hit.

From floods in Thailand and droughts in Australia to fires in California, United States and drying rivers in Europe, the impacts of climate change are increasingly visible.

Along with affecting everyday life, events such as these that result from climate change may affect investments significantly.   

In looking at how climate change affects investing, it is important to distinguish between what companies are doing to become more environment-friendly and the impact of climate change on their financial performance.

Environmental, social and governance (ESG) standards have received plenty of attention in recent years.

Companies are working to reduce their environmental impact with initiatives such as lowering energy usage and carbon emissions, for example, while decreasing waste and preserving natural resources.

The direct impact of climate change on investing, however, is different.

It means looking at how fires, floods, droughts or other conditions that result from climate change could affect returns on investments in particular sectors or companies.

IMPACT ON INVESTMENTS

While it might seem like the impact of climate change may only affect investments decades in the future, the reality is that companies are already being hit.

In December last year, for example, German chemical company BASF warned of lower profits as the Rhine river saw record-low water levels, which hurt its business because it ships products using barges on the river.

And this year started out with PG&E, a California utility, being forced into bankruptcy protection in January after it decided it could not handle billion-dollar liabilities for its possible role in sparking wildfires that devastated Camp and other towns in the state.

Investors are starting to take notice.

As extreme weather events make global headlines, Morgan Stanley’s director of impact investing Lily Trager explained that more investors are thinking about how environmental risks might affect their portfolios.

There may be physical damage to buildings and equipment from floods or fires, for example, or disruption of food and water supplies that affect farming and food production.

Those climate-related disasters cost the world US$650 billion (about S$890 billion) over three years through 2017, Morgan Stanley calculated, with insured losses from natural catastrophes and large man-made disasters totalling US$144 billion in 2017 alone and representing 0.44 per cent of global gross domestic product.

The losses this year could be high as well.

British fund manager Schroders’ global head of stewardship Jessica Ground said that experts expect an El Nino weather pattern to develop this year and cause higher temperatures. That warmer weather could increase severe weather around the world, which could damage companies’ physical assets. Schroders calculated that the cost of insurance for businesses to protect their assets against weather-related hazards could be at least 3 per cent of their market value.

Accelerating environmental change and the growing number of extreme weather-related events may lead to certain sectors suffering damage and rising costs, she added.

FUTURE VULNERABILITIES AND BENEFITS

Looking ahead, analysts see certain sectors as being especially vulnerable.

Changes may negatively affect nine sectors over the longer term, Morgan Stanley found, including real estate, leisure and consumer retail.

Schroders said that oil and gas, utilities and basic resources are also heavily exposed to the impact of climate change.  

One example, raised by investment management firm Franklin Templeton, is that major apparel companies which promote fall fashion collections in advance of colder weather have been affected by milder winters that have changed customer behaviour and reduced winter-clothing purchases.

And when assessing the impact of climate change on insurance, Morgan Stanley identified three insurers, including Allstate, that have over 10 per cent premium exposure to natural catastrophes.

The news for investors is not all negative, though.

Morgan Stanley also found that capital goods and construction machinery firms could benefit as companies seek to mitigate climate change, for instance, and home improvement companies could benefit from consumers affected by disasters repairing their homes.

Rosenberg Equities’ head of sustainable investing Kathryn McDonald told CNBC that water risks such as saltwater contamination and flooding or drought could benefit companies with technologies aimed at water conservation, filtration, desalination or recovery.

WHAT INVESTORS SHOULD DO

So far, there has been relatively little analysis of which companies will be hurt or helped by climate change.

Investors are wondering, then, what they should do.

It is impossible to know what event or tipping point will cause a change in attitudes sufficient to create an investing catalyst. As Forbes contributor Erik Kobayashi-Solomon explained, intelligent climate change investors must take steps to limit economic exposure to expensive failures, while preserving exposure to the enormous upside potential of a paradigm shift.

When they select stocks, then, investors should analyse the potential impact of climate change and look for reports highlighting the risks.

They should take special care when investing in sectors that analysts at Morgan Stanley and Schroders or other firms said have higher risks, such as real estate, consumer retail, oil and gas, and utilities.

Apparel companies could take a hit, too, if textile exporters with production in Bangladesh, Indonesia or the Philippines are affected by rising ocean levels or floods.

At the same time, investors could look for companies focused on climate change mitigation that will see their products and services in high demand following events such as typhoons, droughts and wildfires.

While the research can take extra time, the payoff can be high.

Related topics

money finance investment climate change

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