Investing in a Changing Climate

The effects of climate change are impossible to ignore and hit the news on a regular basis; whether that is flooding in the UK, Venice and Mumbai, wildfires in California and Australia or record temperatures across Europe. The severity and frequency of physical impacts is increasing across the globe. It is clear that decades of burning fossil fuels is a major contributing factor to rising temperatures and needs to be limited urgently.

But as the world’s population grows, so does demand for energy and greenhouse gas emissions continue to rise. The scale of the challenge is immense, the urgency of action unprecedented.   

More than 180 countries committed to the ‘Paris agreement’ in 2015, the most significant international climate treaty. They concur on the need to restrict future temperature rises to within 2°C in order to limit the environmental and economic damage – but the pledges made by these countries to make that happen are not sufficient and we are currently on a trajectory of over 3°C warming by the end of the century. Public pressure on governments and industries to go further and aim for net zero by 2050 is growing.

As a consequence, climate change has significant implications for investors: companies and economies will likely incur major costs during the global transition to low-carbon energy sources for example from growing regulation and carbon pricing. In addition, there will be significant costs from increasing physical damage linked to climate change such as damaged infrastructure but also water stress and crop yields. Investment in adaptation is needed to increase resilience in the future. 

Investors need to understand how these changes will affect the value of their investments. This involves gaining an in-depth understanding of how each company is exposed to material issues related to climate change, and what these companies plan to do to tackle these challenges.

That said, there are opportunities as well as risks. The transition to a low-carbon economy will require large amounts of private capital to construct renewable energy infrastructure, low-carbon transport and improve energy efficiency. Investors play a critical role in financing the low carbon transition through their capital allocation decisions, engagement and policy advocacy.

Read the full white paper from Aberdeen Standard Investments: Investing in a Changing Climate