Climate change is a social, environmental, and economic nuisance.
Climate change is redefining the competitive advantage
Climate change, in a nutshell, can be defined as the abrupt change of localized climate conditions, including temperature and humidity alterations, which give rise to a number of damaging ripple effects like habitat loss. On the financial scene, climate change can be traced as a prime contributor to climate-induced inflations, supply chain disruptions, and even job losses. As per an ILO report, India alone is estimated to lose about 5.8 percent of working hours by 2030, which translates to a productivity loss equivalent to 34 million full-time jobs predominantly due to global warming.
In India, the agricultural and construction sectors are getting affected the most. Climate change is happening at an alarming rate due to man-made as well as natural factors. The indiscriminate usage of renewable fossil fuels and other biological resources derived from biomass directly or indirectly for economic purposes with little to no regard to ecological impacts is having an adverse effect on the global economy.
Climate Change – A Systemic Risk to the Financial Sector
Climate change is a social, environmental, and economic nuisance. Though the short-term impacts of climate change are already visible in the financial sector, it is feared to have its greatest negative impact in the long term.
Climate change is a systemic risk to the financial sector that calls for heightened scrutiny and enhanced efforts on the part of financial and climate change regulators across the globe. In the context of a financial system, systemic risks are those risks that can potentially destabilize the normal functioning of the system and lead to serious consequences for the greater economy.
There is an increasing trend to find alternative sources of fuel to power the economies of the future. Investors nowadays cannot afford to assume that economic growth will continue to be heavily based on an energy sector powered predominantly by fossil fuels. This scenario is not really all adverse as it presents investors with both risks and opportunities.
Various Climate Change Risks To An Investor
Climate Change poses the following types of risks at best. Careful, detailed analysis of such risks on the part of investors helps them assess how to address them so as to achieve long-term financial stability effectively.
Adverse climate events such as violent storms, flooding, and droughts can severely disrupt important international supply chains. The harsh impact of floods on the semiconductor industry of Thailand in 2011 is a notable example. One of the most pervasive and severe physical threats from climate change is sea-level rise. The ocean surface warming has directly resulted in the melting of polar ice caps in Polar Regions like Greenland and Antarctica. This has already raised global mean sea levels by roughly three inches over the past 25 years, and it continues rising roughly 1cm annually in recent years as per a Nature.com report.
Regulatory and Policy Risk
National, regional and local regulations are tightening in light of global climate changes. Examples include more stringent emission controls, energy efficiency standards for residential and office compounds, and fuel efficiency standards for automobiles. Another good example is the EU-led adoption of higher taxation on carbon emissions.
Climate change is redefining the competitive advantage in a number of industrial sectors. Consider the automobile sector, for example. In the coming years, companies that do not have a strong presence in the electric/low-emission vehicles market will be left behind in market capitalization. Talking of the energy sector, companies that have accumulated a lot of carbon-based fuel resources will find themselves at a disadvantage as the world moves on to cleaner and renewable sources of energy.
In light of the long-term transition towards a zero-carbon global economy, companies or investors perceived as “part of the problem” will face growing reputational damage from newly active stakeholders. Some of the big players in the fossil fuel scene in the Middle East, for example, are facing both customer and investor ire along with growing resentment against the institutional shareholders. Significant divestments from the fossil fuel sector have already started.
How can Investors Tackle this Climate Menace?
Climate change is a serious problem, but with foresight and proper planning, investors can get the better of the situation. There are various tools already in place for investors to consider. Some of the most obvious ways are as follows:
One of the hottest and upcoming ‘environment-friendly’ fixed-income instruments whose earnings are targeted towards environmental conservation, climate mitigation, or climate adaptation projects. International financial entities like European Investment Bank, World Bank, etc. along with similar corporations typically issue these bonds to provide support to investment in areas such as renewable energy infrastructure, energy efficiency, sustainable waste management, sustainable land use, biodiversity conservation, etc.
Low-Carbon Index Products
Various investment products based on low-carbon indexes are becoming more available to even the most basic investor nowadays. Examples include Mutual Funds and Exchange-Traded Funds (ETFs). Most investors can go down this alley mainly to lower regulation and policy risks from climate change. But there are reputational, Govt. and other benefits associated with investing in ‘low-carbon-footprint’ companies.
Hedging (risk mitigation) with Derivative Instruments
Derivates are viable options to hedge on climate-sensitive assets. For this, you may go for “options” and total return “swaps” if they suit your financial goals. One approach may be to make use of “put” options to hedge against baskets of securities or indexes. Again, investors could implement a total return swap, which aims to transfer both the credit and market risks of the assets in question.
Try to invest in companies that care for the environment because there’s no Planet B for us to stay and survive. Whatever green investment options you choose, make sure you first consult with your financial advisor to safeguard your hard-earned money.
That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.
(About Author: Arindom is a professional writer, editor, blogger and a member of the International Association of Professional Writers and Editors, New York. A management postgraduate in finance with extensive industry exposure, he is associated with many reputed global online magazines and publications as a regular contributor. He loves to help his readers writing highly informative and well-researched investment-related content to make informed decisions.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of organization)