The climate change economy: profit from sustainable investments
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Climate change is real. What that means for investors.

Climate change will have massive impacts on both society and the economy. Investors and companies will have to adapt. However, despite all the risks, climate change also brings new opportunities to the markets. Sustainable investments and new technologies have great potential.

Climate change will affect everyone, including investors

The topic of climate change is omnipresent. In particular, risk awareness has significantly increased in recent years across the globe, as a 26-country survey by the Pew Research Center shows. Around 67 percent of those surveyed consider global warming a major threat; a significant increase from just 56 percent in 2013.

 

Climate change is also a polarizing topic, not least because of disputes over who should bear the costs for the desired energy transition and reduction of unfettered, global CO2 emissions. This global challenge will also affect investors. The impact of climate change on society, the economy, and companies will be much larger than many think. And all of this affects the world as a whole.

massive-growth-in-co2-emissions-is-fueling-climate-change

Massive growth in CO2 emissions is fueling climate change

Source: The Economist, LeQuéré et al. (2018), Global Carbon Project (GCP), Carbon Dioxide Information Analysis Center (CDIAC)

Sustainable investments have great potential

Investors have various options to fight climate change. One option is to reduce certain loss risks through consistent application of sustainable asset management criteria. With this type of holistic strategy, they can even achieve better performance.

Another option is for investors to actively invest in change – for example, in "impact investments". Such investments specifically support companies or projects that contribute to sustainable social development. such as the financing of sustainable infrastructure projects. Or they can invest in a variety of investment themes that are benefiting from climate change. This includes themes such as "smart mobility," "renewable energy," "edutainment," or sustainable solutions in the "water market".

Climate change is already affecting the economy today

The long-term effects of climate change on the financial markets are not yet obvious. Still, there are four aspects that are of paramount importance for companies:

  • There is the risk that natural catastrophes will damage important corporate assets such as factories and operating infrastructure. A study by Greenwatch estimated that the percentage of corporate assets exposed to climate risks is between two and twenty percent of market capitalization.
  • Financial incentive taxes will be a bigger burden in the future. Right now, countries are collecting CO2 taxes to the tune of only CHF 30 billion. This isn't very much when compared to the CHF five trillion that companies are making in profit worldwide.
  • Liability risks are on the rise. In California, for example, the listed power company PG&E recently came to an agreement with plaintiffs to pay a settlement equivalent to CHF 11 billion. The background: PG&E should have taken into account that its high-voltage power lines have recently become a threat for forest fires given years of rising temperatures in California.
  • Fourth, in the future, climate risks will feature more in "integrated reporting" (IR) and external audits in order to give investors more transparency.

Climate change is altering investors' risks

The challenges for the insurance industry are particularly serious. Since the 1970s, the number of those insured has increased twenty-fold. That said, the industry has adjusted to this change. Liable insurance capital has multiplied and insurance premiums have increased significantly in recent years, both in absolute terms and relative to insured loss. In addition to precautionary measures, questions of damage insurance and risk diversification are growing increasingly important. This also affects investors. They, just like companies and society as a whole, will need to address these topics more seriously.

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