We share how understanding climate change is more crucial than ever for investors and businesses.

The summer of 2018 is not short of extreme weather events. Images of destruction litter news headlines: a 2,500-tonne tanker smashed into the bridge connecting Kansai Airport; high rise buildings swayed by ferocious winds in Hong Kong; hundreds killed by landslides and flooding in the Philippines and Japan.

Typhoons such as Jebi and Mangkhut are individual weather events that may not be easy to link directly to climate change. But what is clear is that the frequency and intensity of such extreme weather events are increasing, which are caused by climate change (think warming oceans generating strong wind currents and more precipitation, more frequently).

These in turn can have huge impacts on businesses, disrupting ongoing operations and damaging infrastructure and assets. In the US, Hurricane Florence is estimated to cost at least US$17 billion. In Asia, Jebi’s insured cost is estimated at $2-4 billion, while the bill for Hong Kong and China also runs into billions of dollars as a result of Mangkhut.

Impact on business

Businesses therefore need to adapt and increase their resilience to climate impacts. Acute impacts such as flash flooding or typhoons can cause unexpected and significant damage to a business’ operations and supply network. Longer-term chronic impacts such as sea level rise are likely to influence investment decisions, particularly in long-term assets.

Additionally, there is increasing expectations on the private sector to mitigate their contribution to climate change. IPCC’s Special Report on Global Warming of 1.5ºC makes it clear that urgent and radical measures are needed to keep global warming to a maximum of 1.5ºC. Any scenarios above that, even at 2ºC, would have substantial adverse impacts. The planet is currently project to hit 3ºC even if existing targets are met, it is therefore clear that governmental efforts are not sufficient and that businesses have a critical role to play. 

Impact on investors

For investors, given their duty and/or desire to grow their investments, it will become imperative to assess their exposure to climate risks and opportunities, and how these may impact their rates of return, positively and negatively – just as they do for other financial and non-financial risks.

Apart from asset write-offs, lost revenue and higher insurance premiums arising from extreme weather events, investors also need to be wary of other risks such as policy changes (as governments are under pressure to radically curb carbon emissions) and market economics (as conscientious consumers shift away from carbon-intensive products). These are likely to lead to ‘stranded assets’, which has an estimated worth of 1 trillion euros in exposure by EU financial institutions alone.

But there are opportunities too. Apart from seeing a continual growth of the renewables sector, investments in energy efficiencies and smart technologies have played an important role in reducing carbon emissions. Recent research has also shown that companies that have stronger ESG standards tend to outperform.

What do investors and businesses need?

In order to analysis and assess the risks and opportunities presented by climate change, investors would need:

• Climate data and scenarios to help them understand where and what their exposures are

• Clear policy and guidelines to assess and weigh up transitional risks

• Reporting and disclosure from portfolio companies on how they are adapting and building resilience, and seizing opportunities

Frameworks such as the Taskforce on Climate-related Financial Disclosures (TCFD) offers a logical and practical structure to help investors (and other stakeholders) conduct relevant climate analyses.

For portfolio companies, they would also need to understand what different climate scenarios (eg 1.5ºC, 2ºC, 4ºC) mean for their operations and value chains, and enable them to build adaptation and resilience strategies. They will have to go far beyond minimal compliance, and really consider climate impacts as part of their core business risk analyses and strategies.

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