Why long-term investors must weigh climate-change risks

A new white paper dives into the issue’s implications for four asset classes

Why long-term investors must weigh climate-change risks

Investors have an opportunity to manage long-term risk and achieve outperformance by acknowledging the issue of climate change, according to one global investment manager.

“In our view, addressing climate change risk is critical to adding alpha, while reducing risks and avoiding catastrophes — in every asset class that adopts a long-term view,” Nuveen wrote in a new white paper.

With regards to public equities, the firm said that climate change creates three material risks for companies: physical damage, increased liability, and reputational damage. “[E]ach sector’s exceptional risk exposures must be considered,” the paper said, noting risks such as waste management liability in the tech sector, possible future regulatory action on CO2 emissions in the utility sector, and ripple effects from hindered crop production in the agricultural industry.

“Companies that successfully account for the impact of climate change have the potential to perform in line with, or better than, their peers,” the firm asserted, citing the modest outperformance of the MSCI Low Carbon Target relative to the MSCI ACWI since 2010.

The opportunity from green bonds has also been increasing. According to the firm, the green-bond space has grown rapidly since the first issuance in 2007. “The labeled green bond market alone has grown to $452.9 billion and has rapidly diversified,” it said, citing figures from the Environmental Finance Green, Social and Sustainability Bonds Database. The unlabelled green-bond space, meanwhile, is estimated to be roughly three times as large as the labeled market.

For real assets and private markets, Nuveen pointed to the threats posed by symptoms of climate change — storms, droughts, wildfires, and erosion — on farmland investment. There’s also a less visible danger as increased deforestation creates a cumulative harmful impact by affecting weather patterns. “Scientists estimate that 15% of global carbon dioxide (Co2) emissions are due to deforestation,” the white paper said, going on to lay out the importance of sustainability in farmland investment.

Finally, climate change also has implications for real estate investment. “Real estate represents roughly 40% of global carbon emissions, so it is a significant part of the current problem and also part of the potential solution,” the paper said. Aside from increased energy-efficiency regulation and legislation in Europe and the US, Nuveen cited the World Building Council’s call for all buildings to become “net zero carbon” by 2050 in support of the goals of the Paris Agreement.

“The evidence continues to mount that these buildings are easier to sell, more attractive to tenants and less vulnerable to obsolescence,” the paper said.

Noting that certain chronic and severe climate-change impacts have already been “locked in” to occur over the next 30 years, the paper argued for the importance of assessing physical risks in property investment. “We must prepare for the inundation of low-level coastal areas, increasingly severe storms, heat stress and wildfires, and drought,” it said.


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