Climate Risk is Investment Risk

The impact of climate change is a major risk the financial markets

Photo credit: Alex Hockett

For over a decade, climate change has been a subject of intense debate. But recent innovations in technology, from renewables to batteries, have disrupted the traditional energy sector, increasing pressure on carbon-related companies and by extension their investors.

The risks associated with climate change pose a significant financial challenge to institutional investors and other asset owners. Massive sums are at stake: by the turn of the century, the damage from climate change could subtract as much as 20% from global GDP.

Meanwhile, these investors must also prepare for a wave of regulation spawned by governmental climate policies.

From an investment standpoint, the all risks associated with climate change are not inherently adverse. For asset owners and investors, these risks can also present enormous opportunity.

For example, the transition to a lower carbon economy is estimated to create a need for as much as $1 trillion in new investments.

To deliver the infrastructure needed to keep the planet within the 2 degrees centigrade warming goal requires approximately 1% of world GDP each year.

As the climate change policy moves past the discussion phase and implementation starts to gain momentum, the specter of increased regulation only raises the level of pressure on investors and asset sectors.

Since the Paris Climate Agreement came into effect in November 2015, climate change has moved to the forefront of the global agenda. More than 190 countries remain committed to reducing carbon emissions.

Although the United States recently withdrew from the agreement, many of America’s cities and states have committed to the Agreement’s goals.

The Paris Agreement is a move in the right direction, but the reality is that government policy alone will not significantly reduce the risk of catastrophic climate change.

Source: BlackRock Investment Institute and Climate Action Tracker Project, July 2016

Traditional financial services firms would seem a logical choice to fill the so-called “Paris Gap”, given their track record of innovation.

Despite the best of hopes, investment banks have not yet come to the rescue.

Hillcrest Strategies’ new white paper, Climate Risk: Innovation in a New Era of Responsibility, we examine the changing financial landscape as asset owners and global investors grapple with the uncertainty and opportunities of climate change.

We also assess the role of new innovators from outside the financial mainstream in addressing this global issue.

Download the complete white paper here.

Marlon Weems is the founder of Hillcrest Strategies, an independent consultancy focused on innovative technologies.