Climate risk or opportunity?
Over the next 20 years, humans across the globe will experience extreme climate-related disruptions. These include weather events, rising sea levels, heatwaves, and a tremendous loss of biodiversity. These climate changes will affect all aspects of our lives - the reality is, they already are (1).
Decisive action is needed as the world moves into uncharted territory. We face pivotal questions, with the power to shape the future of asset management: How to do the right thing, fulfill fiduciary responsibilities in the interest of our pension participants, and deal with polarizing debates and societal pressure? Do you keep your back straight under strong societal pressure?
Understanding physical and transitional risks
Before exploring how climate risks can be turned into climate opportunities, it is best to understand the two categories of climate risks: physical and transition risks. When we think about climate risks, images of the damage wrecked by storms or droughts come to mind - these are physical risks. These phenomena can disrupt economic activity, destroy capital, and halt daily business operations (2).
On the other hand, transition risks refer to the potential losses incurred while we adjust to a lower-carbon economy. For example, carbon taxes to cap emissions will add to production costs while the shift towards renewable energy has massive implications on employment in fossil fuel industries (3). Furthermore, the recent surge of climate litigation against fossil fuel firms and related polluting industries has introduced a new risk for corporate inaction on the climate crisis (4). Although asset managers have yet to be taken to court, earlier this year Vanguard faced accusations of failing its fiduciary duty by inadequately addressing climate risk (5).
Whether the threat of climate risk is physical or transitional, the actions we take today will have crucial ripple effects in the coming decades. While this is a sobering thought, the journey to a net-zero economy holds incredible opportunities to revolutionize businesses and societies to a greener future.
Expanding the horizons of renewable energy
The energy sector's response to climate change has created investment opportunities globally. In 2022, investment in renewable energy, electric vehicles, low emission fuels and grid/storage services matched with fossil fuel investment for the first time (6). This year, it is set to outperform the latter by $0.7 trillion (7). Furthermore, mitigating climate risks offers investment opportunities beyond solely clean energy. Climate tech refers to technologies to address the effects of climate change, progress decarbonization efforts, and contribute to sustainable development. This includes the technology behind clean energy such as solar panels and wind turbines. Climate tech also includes carbon capture and sequestration, weather prediction, and early warning hazard systems to name a few (8). Investments in the latter two form a larger effort towards improving climate data collection, a crucial factor in making informed investment decisions in a rapidly changing world.
Reframing the lens of climate risk to climate reward could open a door to imagining a brighter, greener future for all. However, even if asset managers are receptive to climate opportunities, navigating the road ahead will not be without challenges that question just how ready the world is for decisive climate action.
Challenges to financing climate action
One of the key obstacles facing asset management on the climate front is the politicalization of climate action. Earlier this year, asset managers in the United States were hit by a wave of anti-ESG legislation across the country as lawmakers sought to ban the use of ESG measures in investing public money (9). Although such opposition to climate-minded investment has not arisen in Europe yet, this does point to the polarization of climate-related action today.
Skeptical voices in the EU raise concerns about the cost of transitional risks in the transition to a lower-carbon economy, primarily targeted at inconsistent reporting standards under the EU’s Sustainable Finance Disclosure Regulation (10). Beyond a business perspective, high profile stunts by climate activist groups have soured some perceptions on climate action in general. In the UK Just Stop Oil protestors have faced violent public backlash, while a German poll found that public support for the climate movement has halved following the rise of street blockades by the activist group Last Generation (11). These concerns point towards the challenges of implementing ambitious climate goals. How can we best deal with these challenges and keep acting in line with our goals?
A catalyst for change
As climate risks become climate realities, asset managers must navigate the complexities of climate responsibility while aligning with fiduciary obligations and dealing with societal pressure. Rather than a limitation or obstacle, what happens when we view discussion and societal debate as an opportunity to foster meaningful change?
Footnotes
