How is climate change affecting global economies and investment markets?

In recent times we have seen a number of extreme weather-related events and marine temperature abnormalities causing major disruption and suffering around the globe:

There is little doubt that climate change is going to shape what the future looks like.  Whether we adapt or not, there is a huge financial impact which is going to change industries and economies. The financial impact of weather on the global economy can be billions.

A significant development in the war on climate change was the signing of the Paris Climate Agreement.  This saw almost all the countries of the world committing to making the future global economy climate-friendly.

The primary goal of the Agreement is to limit global warming to a maximum of 2 degrees Celsius, but preferably 1.5 degrees Celsius above pre-industrial times. Therefore, companies must "decarbonise" themselves quickly and consistently.

For the first time, the Paris Climate Agreement makes reduction targets for greenhouse gas emissions scientifically transparent and quantifiable.  This has led to many industries and companies having to innovate and change operations to reduce emissions with the goal of becoming carbon natural.

 It’s therefore creating new investment opportunities in companies trying to revolutionise the way they do business.  We believe that companies trying to take action are more likely to succeed in the future than those that lag behind and don’t adapt to the changing world.

Climate change poses two main types of risk for investors to consider:

Physical risk – this is the risk that changing conditions could have on the investment itself. For example, if a portfolio has a lot of property in coastal regions, rising sea levels may be a threat to their use and long term survival. This may make buying shares in those property’s unattractive.

Transition risks – this is the risk associated with the changes people and governments are making to reduce the effects of climate change. For example, if investors believe governments will pass new regulations that favour climate-friendly renewable energy, they might worry about assets tied to fossil fuels, such as stocks of coal companies or bonds issued by oil-exporting countries.

It’s important to understand the risks that climate change could pose when looking for ways to invest. It is also important to consider the long-term view. Even if the short-term impacts of climate change may be uncertain, in the long-term, it is likely that the effects of climate change will become more severe and more widespread. Therefore, investors should consider strategies that are resilient to climate change and that can generate returns over the long-term.

Before making any investment decisions it’s always important to do your research and think about the risks you are willing and able to take. The views expressed in this document should not be taken as a recommendation, advice or forecast. If you’re unsure about any aspect of investing you should speak to a financial adviser.