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Climate change is a risk for investors – and an opportunity

Never has the subject of climate change been as topical as it is today. In an interview, Reto Knutti, professor of climate physics at ETH Zurich, explains what this means for the economy and investors. He is convinced that sustainable investing can contribute to protecting the climate.

As a researcher, what do you think of the current, global discussion about climate change?

Reto Knutti*: Climate change has been discussed internationally for the past 30 years. Only recently, however, has there been a slight change in public perception. Perhaps the time has simply come for something that had been long overdue. How permanent this change is, however, remains to be seen.

How can global warming be stopped?

CO2 is everywhere: In agriculture, in transportation, it permeates through every part of our lives. For that reason, climate change can also not be stopped with one measure. It’ll take lots of measures. Climate protection is a problem for all: Everybody must do their part. But it's not that simple. To put it bluntly, people are stupid, selfish, and not very good at thinking far into the future.

This now seems to be changing. Social pressure is increasing. Can personal responsibility stop climate change?

Many things won't be achieved through market and personal responsibility alone. This doesn't work in reality. Past experience shows that for climate protection to be implemented, there will have to be a cost and it will take rules. The state has to create corresponding framework conditions.

Companies should consider climate protection to be an opportunity to innovate.

Reto Knutti, professor of climate physics

What measures have the biggest effect?

In Switzerland, a large proportion of CO2 emissions is generated in buildings. They make up one-third of all CO2 emissions. Although it would be technically simple to improve this. For instance, if old oil-fired heating systems were replaced with greener alternatives instead of a new oil-fired system. Many emissions are also caused by private traffic with increasingly bigger cars and more miles driven, as well as by flying. Industry is already taking steps even if primarily for business considerations.

So have businesses already started rethinking their approach?

At least an understanding of the problem exists. In certain areas, there is also innovation in this regard. But large parts of the economy fare well with the existing system. As long as the money machine keeps humming, little will change. Here it's a matter of time before businesses will be ready to do away with existing patterns.

How can the balance between protecting the environment and reaching economic targets be achieved?

Companies should consider climate protection to be an opportunity to innovate. Switzerland could position itself as a pioneer in research and services.

Investors are often crucial for the direction of a company. Have they noted the relevance of the climate debate?

In the past, investors took the view that a higher return can be generated with classic investments. This is a very short-term way of thinking, and incorrect. In the meantime, there are fortunately ever more people who want to earn money, but want to do so in a way they find ethically acceptable. Other investors are changing their approach for risk reasons.

Can you explain this to us?

Today, businesses are already partly affected by the direct effects of climate change. However, risks are also showing changing customer behavior or regulatory measures. The risk of legal action is also real. After all, the interrelation of CO2 and environmental damage is indisputable. Although there are still no framework conditions or rules that can be used to hold businesses accountable, the financial risk already exists today.

How can investors counteract global climate change?

It is possible, for instance, to rule out certain companies or sectors in a targeted manner during the investment process. By contrast, it is tougher to invest only in particular climate-friendly companies in a targeted manner. To date, there is a lack of uniform standards.

There's no right or wrong. The question is in fact where can I make a contribution myself the way I want?

Reto Knutti, professor of climate physics

Do such investments really have consequences?

The individual only has a limited effect, of course. However, if lots of people think similarly, the economy will also follow suit. It's important that the process is kicked off. However, it will stay with us over the coming 50 years.

What kind of sustainable investments are the most practical?

There's no right or wrong. The question is in fact where can I make a contribution myself the way I want? To do so, it's important to find a partner who can provide relevant advice. This means that the banks need people who know the details of what climate protection is all about and ensure that investments actually have an impact.

Internationally, there is a sense that negotiations have no consequences. Is that the wrong impression?

Unanimity is required for international treaties. It only takes one party to spoil that. That's why no agreement can be found. Nevertheless, ever more countries are actively addressing climate protection. For instance, several countries are pursuing a net zero CO2 target.

What role does Switzerland play here?

Switzerland is playing something of a waiting game. Politicians are waiting to see what others do. Personally, however, I take the view that Switzerland as a country should be involved in shaping the climate discussion and be driving innovation. The financial center, in particular, can contribute to this. After all, Switzerland has a large financial sector; it has an impact beyond the borders of the country. This means that, as a small country, we have great leverage with a large number of options and a high level of responsibility.

How optimistic are you that climate change can be stopped?

We've waited too long. That's not a good thing, of course. At the same time, we've never had as many options as we have today: We have the knowledge, the technologies, the money, and now also the willingness of society to do something. I'm therefore confident that we can largely solve the problem. But it will take the societal and political will to do so. This will require more than a good old New Year's resolution – also among investors.

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