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How Investors Are Thinking About Climate Change Risk

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How Investors Are Thinking About Climate Change Risk by BlackRock

The climate summit in Paris, and subsequent agreement, has implications not only for greenhouse gas emissions and the world at large, but also for your portfolio. BlackRock’s Deborah Winshel explains.

The climate summit in Paris brought together entrepreneurs, financiers, philanthropists and nearly every country in the world to drive the reduction of global greenhouse gas emissions. The landmark climate agreement resulted in a number of key provisions, including:

  • Formalization of close to 200 country pledges to reduce emissions and promote low carbon technologies
  • Creation of framework to measure progress and ratchet up commitments
  • Reaffirmation of developed country support of emerging market economies’ climate financing

The Paris summit sent a powerful signal to the private sector that the global economy is moving toward a low-carbon world. We see four macroeconomic trends driving this focus on climate risk and sustainability:

  1. Investor awareness of climate change risks driving promotion of sustainability issues. The bury-your-head-in-the-sand strategy is not an option. Individual investors are beginning to take a stance on climate change in the way they invest, eliminating the most serious risks and putting their money in companies that support positive environmental outcomes. Many institutional investors are also using their influence and investment capital to bring about positive change. We believe that transparency and reporting standards will be critical as investors seek more information on carbon emissions and sustainability measures.
  2. Industry participation in the climate change debate. One of the unique things about the Paris summit is that it involved more than the usual participants: Attendees included not only diplomats, environmental ministers and heads of state, but leaders from the private sector. Many see opportunities in the transition to a low-carbon economy and are changing the way they do business, from green buildings to waste management to industrial efficiency. Here in the U.S., a coalition of businesses representing more than $7 trillion in market capitalization have signed the White House’s American Business Act on Climate Pledge. As companies old and new shift their focus to sustainability, new opportunities are being created for investors.
  3. Increased research and development spending to reduce emissions and raise energy efficiency. Prior to the Paris summit, 20 major countries agreed to double their clean energy R&D spending over five years in an initiative called Mission Innovation. These countries produce three-quarters of global CO2 emissions from electricity generation and account for 80% of the world’s clean energy R&D spending. The funding could make a massive difference in the development and adoption of renewable energy, as it creates opportunities for public-private partnerships to invest in this new technology.
  4. Climate change risk mitigation efforts start at the local level. Although the Paris agreement established a global framework, any regulations in response to it will be localized. Key markets like China, the EU and the U.S. will have considerable influence on other countries’ responses. The expectation is that regulatory change will affect specific industries, from resources and power generation to manufacturing and building.

What does this mean for you?

As noted in The Price of Climate Change, my colleagues and I believe these trends will not only encourage significant growth in clean technologies, energy efficiency and renewable infrastructure, but also greater transparency and reporting on sustainability and the carbon footprints of corporations around the globe. Furthermore, carbon-heavy industries are not immune from disruption, nor are asset prices from regulatory efforts to mitigate climate change risk. We believe investors should thoughtfully consider these dynamics in order to build sustainable portfolios and take advantage of investment opportunities as we move towards a low-carbon economy.

Deborah Winshel is Global Head of Impact Investing at BlackRock.

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