According to NASA, 2014 – 2018 were the five warmest years on record going back to 1880. Global temperatures in 2018 were 1.5 degrees Fahrenheit (F) warmer than the average from 1951 through 1980. NASA and many members of the scientific community believe that this warming has been driven in large part by increased emissions of carbon dioxide and other greenhouse gases caused by human activities.
Climate Change Environmental and Economic Impacts
Some of the impacts of climate change are more intuitive than others. For example, a warmer planet results in higher sea levels due to a combination of meltwater from glaciers and thermal expansion of seawater as it warms. The National Oceanic and Atmospheric Administration (NOAA) reported that global sea levels have risen more than eight inches since 1880. In fact, the 2018 average sea level was 3.2 inches above the 1993 average.
Other impacts of climate change are not as self-evident. The National Bureau of Economic Research (NBER), a bipartisan economic research organization, recently published a paper analyzing the impact of climate change on global GDP. The study concluded that if global carbon emissions continue to rise throughout the 21st century, world GDP per capita could decline by 7.2% in 2100. Under this scenario, global temperatures would be 6.7 degrees F warmer than today and GDP losses would be driven by declining worker productivity.
Institutional Investors’ Views on Climate Change
One may look at the timeline under which climate change materially impacts global GDP and determine it is not worth considering over the short term. However, asset prices today incorporate risks that investors forecast well into the future. Climate change is a risk that is becoming more important to investors globally. In June 2019 more than 450 institutional investors representing over $34 trillion in assets published a letter to members of the G20 demanding urgent action from governments on climate change. These investors represent a material portion of the world’s invested capital, and their decisions to buy or sell assets can significantly influence prices.
Climate Change Investment Risks
Climate change presents unique risks for virtually every asset class. Regardless of industry, as carbon emission disclosures become standard, companies and issuers that fail to reduce their emissions over time are likely to be penalized by regulators and investors alike. Real estate assets that are vulnerable to rising sea levels could see their valuations decline over time. A 2018 study by the University of Colorado and Penn State University found that homes more exposed to rising sea levels sell for 7% less than equivalent homes an equidistance from the beach that are less impacted by sea level rise (Source: Journal of Financial Economics).
Climate Change Investment Opportunities
Asset Consulting Group (ACG) recently conducted a survey of 35 investment managers across the fixed income, equity, and real estate categories and found that 83% explicitly incorporate climate change risk into their investment process. ACG believes that incorporating climate change risks and opportunities in the investment process is indicative of a firm that takes a more holistic approach to making the best investment decisions possible.
The transition to a low-carbon economy will require significant capital from both the public and private sectors. The International Energy Agency estimates that this transition will require more than $3 trillion of investment per year to finance power generation, energy efficiency, and new transportation infrastructure. Investors are already showing an interest in these types of investments. Green bonds, for example, are issued specifically to invest in climate and environmental projects. Green bond issuance increased from $2.6 billion in 2012 to an estimated $250 billion in 2019 (Source: Moody’s). As consumers consider climate change, corporations need to adapt their product and service offerings for evolving preferences. Sensing a growing market opportunity, a number of private equity funds are being raised to invest in companies that create products and technologies to help reduce carbon emissions and create a more sustainable planet.
Summary
Climate change occurs slowly over time which may make it an easy risk factor for investors to ignore. Recent studies suggest that climate change will have a negative economic impact on long term global GDP. Over the shorter term, investor concerns about global warming may be priced into their assessment of stocks and bonds in the form of lower equity multiples and higher borrowing costs. As consumers become more concerned with climate change, they are likely to change their spending patterns. This may provide investment opportunities in companies that offer more sustainable products and services. As with any long-term secular trend, climate change will likely result in both winners and losers.
Disclaimers: The data contained in this report is provided from Asset Consulting Group (ACG). This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. In preparing these materials, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public and internal sources. Gryphon Financial Partners shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This was created for informational purposes only. Gryphon Financial Partners, LLC is an Investment Adviser.