New guidance allows investors to act on physical risks of climate change

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THE INSTITUTIONAL Investors Group on Climate Change (IIGCC) has launched new guidance for investors, setting out how they can integrate the risks and opportunities presented by the physical impacts of climate change into their investment processes.

Leading investors have contributed to the work from IIGCC, developed with specialist consultants Acclimatise and Chronos Sustainability, and support of the Universities Superannuation Scheme.

Stephanie Pfeifer, CEO, Institutional Investors Group on Climate Change, explained: “Investors have no time to lose in understanding and acting on exposure to the physical risks of climate change.

“The impacts of the climate crisis are already being felt and set to become far more severe.

“A focus on resilience can help protect portfolios and strengthen returns, while enabling communities and the economy as a whole to better adapt to climate change.”

Many asset owners recognise climate change as one of the largest systemic risks to their investment portfolios.

To date, however, relatively little attention has been paid to how institutional investors might assess and report on the physical risks and opportunities arising from climate change.

This is despite a growing evidence base demonstrating the economic consequences of increasingly severe climate change.

John Firth, CEO of Acclimatise, explained: “As a changing climate alters the fabric of economies, societies and environments across the world, it pays to be prepared.

“The investors that can act now to both manage physical climate risks and grasp the opportunities to invest in resilience stand to be in the most secure position in the long-term.

“This guidance acts as a first step to achieving this.”

Research from Cambridge University shows an additional $100 billion of global costs linked to extreme weather events – such as floods, heatwaves and droughts – can be expected through to 2040 alone.

The ripple effect of physical impacts of climate change already with us is also clear.

The high-profile bankruptcy of US utility PG&E – directly linked to the worst wildfires in California’s history – exemplifies the knock-on impacts of a changing climate, which companies and investors can expect to become more common.

As the severity of climate change grows, the urgency for investors to address physical risks becomes more acute.

With over 230 members, representing over €30 trillion in assets, IIGCC is looking to ensure the issue receives the attention it deserves.

The newly published guidance will help investors to:

  • Better understand the investment implications – both risks and opportunities – resulting from the physical impacts of climate change.
  • Take practical steps to identify, assess and manage climate-related physical risks across their portfolios, through the approaches covered in the guidance.
  • Identify ways to invest in solutions that support greater resilience to climate change as well protecting investments from physical-climate related risks. Both approaches are key to strengthening broader societal adaptation to climate change.
  • Draw on additional available tools and data sources in identifying and assessing specific risks, and opportunities, across different asset classes.

A benefit of pursuing adaptation-related investments can be better protection from losses that investors would otherwise face through a greater exposure to physical climate-related risks and associated volatility.

Such an approach may also offer attractive rates of return and high benefit to cost ratios. Research from the Global Commission on Adaptation has shown that investing $1.8 trillion globally over the next decade across five types of investment project – covering infrastructure to crop production – could generate $7.1 trillion in total net benefits.

Assessing investment opportunities is covered in the guidance.

Dr Rory Sullivan, CEO of Chronos Sustainability, added: “Investors should manage the physical impacts of climate change in the same way they manage any other investment risk.

“They need to assess the financial implications for their portfolios.

“They need to take these assessments into account in their investment decision-making, encourage companies and assets to strengthen their governance and management of physical climate risks, and support effective public policy on mitigation and on adaptation.”

The Earth’s climate has already warmed by approximately 1.0°C of warming above pre-industrial levels, with current trajectories showing temperatures are expected to rise by 3.2°C by the end of the century, even if all current unconditional commitments under the Paris Agreement are implemented.

The broader economic damage resulting from the physical impacts of climate change is highly significant.

A study by academics and cited by Schroders among others, shows that the global economy will face estimated losses in income of over $9.5 trillion a year with 3°C of warming, and over $23 trillion at 4°C.

By the academic’s own admission, this is a conservative analysis, given the model used only accounts for some of the impacts of climate change – loss in agricultural productivity, sea level changes, human health and productivity effects.

This doesn’t cover losses from extreme weather events or the increased frequency of fire damage.