Managing the risks and opportunities that come with climate action

Net Zero Challenge

Managing the risks and opportunities that come with climate action

The impacts of climate change are very evident today, affecting everyone, businesses and investors included. Within the rapidly emerging area of ESG, climate change sits at the top in regards to its impact and importance. 

For years, it’s been essential to focus on the investment landscape, but rising pressure is influencing the decisions and actions in the corporate world. Climate change has become a necessary action for business leaders and asset managers.

The transition towards a net-zero economy has gained momentum in recent years. Around two-thirds of global emissions come from countries that have made net-zero commitments and in the last year, there has been a 50% increase in the number of businesses making pledges towards decarbonisation targets.

A growing number of stakeholders are aware of the impacts of climate change and are pushing businesses towards being more sustainable. If companies fail to respond to these mounting pressures, they will likely be at a disadvantage with other competitive markets and experience an impact on their overall economic returns.

Historically, businesses have had a considerable impact on the atmosphere without facing any severe repercussions, but this has changed dramatically. Carbon markets are increasing rapidly, so investors will need to take a different perspective in regards to the risk and opportunities associated with climate change.

Another critical factor is that climate considerations go beyond carbon. They include many other elements including our impact on biodiversity and how businesses use land and water resources. Companies that fail to adopt these changes will potentially face increasing debt capital costs and higher refinancing risk.

The global energy industry is experiencing a significant transition from a dependence on fossil fuel to one predominantly focused on renewable energy. As a result of this change, climate action has become a necessity and increased regulations and commitment from the private sector are rising. At present, there are a lot of targets and pledges being made, but considerable action is needed. Over time these businesses will need to take the necessary steps and live up to these targets which could result in a range of climate-focused investment risks and opportunities. 

 

Increasing opportunities and risks for the future

Climate impact goes beyond carbon, and investors must remember to focus on other areas that affect our climate. The risks and opportunities go well beyond the energy and transport industries, incorporating changes in agriculture, biodiversity and our water resources. 

Applying this broader perspective of defining climate change is becoming increasingly standardised. The concept that today’s climate issues will impact only a part of the market doesn’t stand true. In reality, the disruptive trends we are witnessing will inevitably affect all areas of our economy. Investors no longer view climate action as a choice or something to invest in or decide whether to be exposed to climate change. Each asset class is affected by climate change to some extent. The challenge is managing exposure to climate change. Making investment plans based on previous success in a business isn’t necessarily going to work in a time when these factors are constantly changing.

Big energy players have the experience and a historical understanding of the infrastructure and how to bring energy to the end customer. Today, winners and losers will be those capable of adapting quicker and driving new and innovative changes.

To implement climate action or attempt to manage climate risk in an investment portfolio, the priority for asset and investment managers is to engage on climate risk on multiple levels. How managers can influence and facilitate changes in businesses that drive the transition towards sustainability is critical, and this requires holistic communication and broader engagement.

 

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