Paris, climate change and investing

ESG investingBlackRock, the world’s largest asset manager, is among other financial players making pronouncements on climate change as the Paris Climate Conference, known widely as COP, takes place.

COP will attempt to achieve legally binding and universal agreement on climate policy for the first time.

The ramifications of reforms derived from agreements will affect almost every sector, making the environment an even greater investment issue.

“These profound changes have the potential to affect asset prices in all areas for a long time to come,” says Ewen Cameron Watt, chief investment strategist at BlackRock.

“Efforts to mitigate climate change will produce winners and losers, but maybe not always the obvious ones,” he says.

Watt advocates engagement with the biggest polluting companies, which have the greatest capacity for improvement.

“Engagement with corporate management teams can help effect positive change, especially for big institutional investors with long holding periods,” he says.

But he also points to ‘cleaner’ assets that will benefit from a transition to a low-carbon economy, such as renewable infrastructure debt and equity and selected companies working in energy efficiency and clean technologies.

COP, Watt believes, will finally put a price on carbon emissions, which is key for determining the value of energy-intensive industries. As a result, emitters will be incentivised to improve their practices, and consumers to switch to non-fossil fuels.

Michael Wilkins, analyst at Standard & Poor’s, says the climate conference marks a “critical” turning point in the global fight against climate change, from which “there will be no going back”.

“Making the transition could mean up to €12.8 trillion invested in low-carbon technologies by 2030,” he suggests.

Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, says climate change is already causing unprecedented damage to global financial stability via physical, liability and transition risks.

“Weather-related losses have hit $4 trillion (€3.8 trillion) over the past 30 years and have averaged $200 billion annually over the past decade,” he says.

“Without action, the global mean cost of climate change could rise to 1-5% of GDP every year, with emerging markets and the poor hit hardest.”

Hartnett believes climate change risk will impact investors at the level of asset class, industry and sub-sector. He forecasts global investment portfolios could lose up to 45% of their value by 2020 and average annual returns could erode by 26%-138% by 2050.

Sectors at the greatest long-term risk include agriculture, energy, financial services, insurance, and travel and tourism.

However, investments in cleantech have grown 3.5 times since 2005, to $300-350 billion every year in the past five years, with another $130-300 billion being invested in energy efficiency every year.

“Renewables now account for around 50% of all new power generation, and we estimate they will represent 70-80% of capacity additions from 2015 to 2030. Coal has become a stranded asset, while both oil and gas face growing risk over the decades to come,” Hartnett says.

Key entry points for investors playing the climate change theme are energy efficiency, wind, solar, next generation vehicles, batteries and storage, nuclear and hydro power and cleantech. Investors should also focus on closely related solutions like food security, water and green bonds.

©2015 funds europe