An important part of our approach has been the work of our climate change working group which concluded its research earlier this year.

Over the coming weeks we will be presenting more detail on this research, their implications for investors, and provide guidance on how investors can incorporate these issues into their risk management and investment decision making processes. An outline of the key areas we have focused on is provided below:

Climate change is one of the greatest challenges of our time, with the UN Intergovernmental Panel on Climate Change (IPCC) concluding that rising global temperatures, increasing extreme weather events, rising sea levels and diminishing ice caps are being largely driven by human activities such as the burning of fossil fuels (e.g. coal, oil or gas) and the reduction of forest cover.

Climate change and global warming pose systemic risks to society and the global economy, with major impacts on the availability of resources, the price and structure of the energy market, the vulnerability of infrastructure and the valuation of companies. The World Economic Forum has rated climate change as one of the most significant global risks in terms of both likelihood and impact since 2011 with the 2018 report finding that the top two risks in terms of likelihood and four of the top five in terms of being climate change related.

In 2015, building on agreements stretching back to 1994, the Paris Agreement was made at the 21st Conference of the Parties of the United Nations Framework Convention on Climate Change. The agreement sets an ambitious goal to hold “the increase in the global average temperature to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C”.

In December 2015, Mark Carney, the Governor of the Bank of England and chair of the Financial Stability Board (FSB) stated that “the challenges currently posed by climate change pale in significance compared with what might come. The far-sighted amongst you are anticipating broader global impacts on property, migration and political stability, as well as food and water security”. Subsequently the FSB launched the Taskforce on Climate-Related Financial Disclosure (TCFD) which found that the nature of climate change risks were such that all companies should disclose their assessment and response to the risks in their financial fillings.

For investors climate change poses a complex problem which has already, and will continue to, impact on different investments in a number of ways. In 2013 we convened a group of our investment professionals in a Stranded Assets Working Group to better understand the implications of a transition to a low carbon economy on fossil fuel related industries. The group developed and in 2015 published its findings and a ‘Stranded Assets Toolkit’ to aid investors assessing the issue.

In 2016, we established a climate change working group to take a broader view of the issue and its investment implications. From this work we have identified five key categories of climate change risk facing investors today and into the future.

1. Physical risks of climate change

It is clear that changes in climate and corresponding weather patterns are already having costly impacts on physical assets, business continuity, supply chain resilience and agricultural production. We expect these changes to continue and impacts to worsen as temperatures and sea levels rise. There is also the risk of irreversible discontinuous changes to the climate system if ‘tipping points’ are breached.

Increase in Mean Temperature and Variance

Source: Adapted from IPCC (2001)

2. Regulatory intervention on emissions

National and state level commitments to reduce greenhouse gas emissions are resulting in a variety of policy frameworks being deployed. Other regulatory concerns on air pollution are also impacting carbon intensive companies.

Total climate change laws and policies

Source: Climate Change Laws of the World, Grantham Research Institute.

3. Business transition and stranded asset risk

As the economy shifts to low carbon companies will face headwinds or tailwinds depending on the sectors in which they operate and the opportunities available to them. For some businesses this will be direct - with the risk of assets being written-down or ‘stranded’ while for other businesses the need to retool and realign their business models to utilise low carbon technologies will offer both risks and opportunities.

Power generation mix

4. Director duties and legal risk

An increasing body of legal opinion and regulatory guidance across the globe has found that companies and investors who cannot demonstrate that they have considered the implications of climate change are potentially in breach of their director duty of care and/or trustee fiduciary duties.

5. Reputational risk and potential challenges to a firm’s ‘social license to operate’

The increased sophistication of environmental NGOs, public concern and the reach of social media has resulted in companies who do not act on climate change being increasingly targeted. A good example of the success of these campaigns is the recent lobbying against further bank financing of coal mines and fossil fuel based energy generation.

Each of these areas of risk also feature corresponding opportunities for our clients, from our stewardship, engagement and investment activities on their behalf. 


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