Increasing global temperatures have highlighted the urgent need to address climate change. With record-breaking heatwaves and extreme weather events becoming more frequent, the consequences of climate change are undeniably impacting our world.
Climate change is an investment risk that demands the attention of investors. The events unfolding globally – from the devastating wildfires ravaging both the United States and Southern Europe to the heart-wrenching flash floods in Bangladesh – highlight the direct impact of climate risk on our economies, societies, and portfolios.
Physical climate risk refers to economic costs and financial loss associated with a changing climate. Acute physical risk drivers include increased frequency or severity of climate and weather events (e.g., floods, wildfires, tropical storms, etc.). Chronic physical risk drivers include more gradual shifts in climate such as rising sea levels and persistent changes in levels of precipitation or ambient temperatures. These climate change-induced events can result in an array of catastrophic impacts on human life. They also cause physical damage to property, supply chain disruptions, and scarcity of key inputs. Extreme weather is a cause of global productivity concern.
Understanding the impact of rising temperatures on productivity
Research conducted by climate scientists and economists has revealed a correlation between economic productivity and changes in temperature. While lower temperatures can enhance productivity, there is an optimal annual average temperature of 13 degrees Celsius beyond which productivity declines rapidly. It is no surprise then that whilst the global population is evenly distributed between temperate and tropical countries, much of the global GDP is clustered around this optimum temperature. Rising ambient temperatures therefore may begin to affect economic growth as countries move closer or further away from this “ideal” temperature zone.
The UN Intergovernmental Panel on Climate Change (IPCC), responsible for advancing scientific knowledge about climate change caused by human activities has adopted climate scenarios, known as Representative Concentration Pathways (RCPs), to assess the potential impact of climate change based on future carbon emissions. Analysts estimate that in the RCP 4.5 scenario, an intermediate scenario where emissions peak around 2040 before declining, global GDP could decline by 4 percent, with lower and lower-middle-income countries experiencing significantly greater losses compared to their wealthier counterparts. The intensifying risks regions like South Asia face, where GDP losses of 10-18 percent are projected by 2050, emphasize the need for a nuanced understanding of the financial implications of climate change.
Global efforts are driving change
Governments and companies worldwide have recognized the urgency of decarbonization, committing trillions of dollars to achieve net-zero greenhouse gas emissions by 2050.
Ahead of the UN Climate Change Conference (COP28), the Saudi Green Initiative program has set a goal to reduce carbon emissions by over 278 million tons per year and achieve 50 percent power generation capacity from renewables by the year 2030, contributing to the national target of net zero emissions by 2060.
The United Arab Emirates (UAE) has also committed to achieving net zero emissions by 2050, the first country in the Middle East to do so, through a mix of reducing flaring of natural gas, increasing energy efficiency, and deploying clean energy solutions. Last year, the UAE and the United States signed a US$100 billion agreement to deploy 100 gigawatts of clean energy by 2035. Expectations are high for COP28, hosted by the UAE this year, as world leaders come together to take stock at the halfway point for the Paris Agreement and the critical 2030 target year for a decline in emissions.
Stepping up: Opportunities for investors
It is clear that we need new and innovative solutions to help companies and countries move towards less carbon-intensive ways of doing business. Across sectors and geographies, scientific breakthroughs and technological innovation are responding to this demand, presenting an opportunity for investors to participate in this “clean revolution”.
There are a variety of ways to gain exposure to these trends. But investors need to act fast.
The number of public market funds investing in climate has accelerated from fewer than 200 in 2018 to about 1,400 as of June 2023. This includes both climate transition funds, investing in companies that are adapting their business models to a lower carbon future, as well as clean energy funds which are directly investing in sectors of the economy providing cleaner solutions. Assets have grown 30 percent in the last 18 months fueled by investor interest in Europe, China, and the United States.
Private equity investments in climate-oriented sectors have also seen remarkable growth. The global volume of climate-oriented equity transactions is estimated to have surged by 2.5 times, rising from approximately US$75 billion in 2019 to reach US$196 billion in 2022. This growth has been particularly notable in areas like power, transportation, hydrogen, and carbon management.
Expert advice and knowledge
As the world re-calibrates, there will be winners and losers so it is important to get expert advice in order to identify investments that can help promote sustainable outcomes whilst generating healthy returns for investors. It also requires an active approach from fund managers, using their knowledge and skills to navigate the complexities of this evolving landscape.
As temperatures continue to rise, it is imperative that we act swiftly to address the challenges posed by climate change. By seizing the opportunities presented by investing in climate solutions, we can create a resilient and sustainable world for future generations. This way individuals can open avenues to a sustainable tomorrow, where investments aren’t just vehicles for growth, but catalysts for change.
About Neha Coulon
Neha Coulon is a managing director and head of ESG for EMEA at J.P. Morgan Private Bank based in London. In this role, she leads the ESG efforts in the region, setting the business strategy and helping its clients achieve their sustainability objectives.
Neha spent over a decade at the J.P. Morgan Corporate and Investment bank where she provided investment solutions to some of the largest pension funds and asset managers across Americas and Europe. From 2017 to 2020, she served as the EMEA head of Sustainable Finance in J.P. Morgan’s corporate office where she led corporate sustainability initiatives, including engagement with EU policy makers, industry leaders as well as key clients focused on sustainability.
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