Climate change and its risks are going mainstream. We explain what the raft of new regulations to cut carbon emissions means for investing.
Climate change and its risks are expanding their footprint. What does the raft of new regulations to curb carbon emissions mean for investing? How do you reduce climate risk in portfolios? We debated this with colleagues, clients and industry representatives during a one-day video conference in September. This new BII publication summarizes the key conclusions.
|Climate change risk has arrived as an investment issue. Governments are setting targets to curb greenhouse gas emissions. The resulting regulatory risks have become key drivers of investment returns across industries.|
|Do securities of companies most susceptible to physical and regulatory climate risks already trade at a discount to the market? We have not observed such a discount in the past – but could see one in the future.|
|Global insurers have led the way in pricing of natural disaster risks. Hurricane Andrew in 1992 almost wiped out the industry, leading to a revolution in the way it prices risks. Other sectors need to catch up.|
|We discuss ways for asset owners to promote sustainability, including a focus on environmental, social and governance (ESG) factors. We view ESG excellence as a mark of operational and management quality.|
|Divesting from climate-unfriendly businesses is one option. The biggest polluting companies, however, have the greatest capacity for improvement. Engagement with corporate management teams can help effect positive change.|
|The focus on sustainability has unleashed a torrent of new data. These can be used to measure physical and regulatory environmental risks, to mine for alpha opportunities or to reflect social values into portfolios.|
|We analyze the carbon intensity of an insurer’s corporate debt portfolio and discuss research that ties improving carbon efficiency to equity outperformance.|
|Efforts to mitigate climate change will produce winners and losers—but not always the obvious ones. The oil industry and energy-exporting countries may look like losers, yet low-cost operators should do fine as de-carbonization will likely be gradual.|
|We like renewable infrastructure debt and equity, but recognize the risk of bubbles in this high-growth sector as too much capital chases limited opportunities.|