It’s impossible to ignore the issue of climate change in 2022. And certainly, if you’re invested in the markets, you wouldn’t want to.
One reason to pay close attention could be that you hope to invest in line with your beliefs and values, supporting those carbon-reduction and environmentally sustainable practices and solutions that will help make the world a better place for your children and grandchildren.
But there’s another reason – one that holds weight from a purely financial perspective.
The fact is, rising temperatures, climate-related policies and new technologies are presenting financial risks and financial opportunities. And while some are in the more distant future – such as the fate of ski resorts in a warmer world – others are nearly upon us. Think of the implications of Europe’s ban on new petrol and diesel cars by 2035. Or the rise in drought-tolerant crops in Australia.
Avoiding risk and embracing opportunity are critical to the long-term health of your investment portfolio, and to your super balance.
Physical investment risk explained
There are two kinds of investment risk when it comes to climate change. The first is the physical risk – the impact more frequent severe weather events can have on businesses and the economy at large.
Beyond their capacity for physical destruction, fires and floods can disrupt a company’s vital supply chains. For example, many businesses in the Hawkesbury region of NSW ground to a temporary halt this year, cut off from transport links once more as the Windsor Bridge in Western Sydney was again blocked by flood waters. On a larger scale, the global pandemic has demonstrated just how vulnerable many international businesses are to an unexpected pause in essential supplies.
That’s why it’s important for investors to consider the individual companies, whole sectors and entire countries that have the fortitude and adaptability to sidestep such issues – to survive and even thrive.
Take Australia’s agricultural industry. There you will find farmers who have leased part of their land to a solar farm, their sheep grazing among the solar panels. On top of providing an alternative income, this approach is also increasing the quality of wool, according to early results1. Then there are the many wine producers in Australia that have already adapted their business to respond to higher temperatures, with positive results2.
Transition investment risk explained
The second kind of climate risk is known as ‘transition risk’. Perhaps more concerning in the short-term, it’s associated with transitioning to renewable forms of energy.
This is becoming ever more relevant as many countries, including Australia, sign up to a net-zero emissions target by 2050. With this target just three decades away, the UN-supported Principles for Responsible Investment state that meeting it will require an immediate cessation of new gas and oil exploration, a rapid adoption of renewable energy and a huge shift in production methods and consumption patterns.
That’s going to impact a lot of businesses, resulting in some clear winners and losers. For an investor, it will be a matter of assessing the likelihood of a company with an old business model becoming rapidly irrelevant or the very real risk of having stranded assets within an investment portfolio. Those that are wholly dependent on fossil fuels are clearly vulnerable – mining and electric utility companies being notable examples. But businesses and even sectors that are indirectly affected might also be left behind, including those that supply parts and services to these businesses.
On the upside, any sector that is part of the large-scale deployment of enabling technologies, materials and services will be well placed to benefit from the rapid change to net zero. So too will be companies that take the lead in adapting to a carbon-constrained economy.
Investing with confidence
Of course, whether it be risk or opportunity, neither is readily apparent. It takes in-depth research and a deep understanding of the issues to make smart investment decisions.
It also takes collaboration. It’s why, we rely on investment managers with strong environmental, social and governance credentials and a wealth of experience in ESG investing. We also turn to the Investor Group on Climate Change (IGCC) to help frame our decisions. A collaboration of Australian and New Zealand investors, the IGCC encourages best practice when it comes to assessing the impacts of climate change on potential investments. It also provides valuable information to help investors understand and incorporate climate change into their investment decisions.
In a world that’s rapidly shifting and adapting, there’s no doubt that the power of many will play a huge and vital role in our future success – both as investors and individuals.
Please contact us on 02 9554 3566 if you’d like to discuss your investment strategy.
Important information and disclaimer
This article has been prepared on behalf of NULIS Nominees (Australia) Limited ABN 80 008 515 633 AFSL 236465 (NULIS) as trustee of the MLC Super Fund ABN 70 732 426 024. NULIS is part of the group of companies comprising Insignia Financial Ltd ABN 49 100 103 722 and its related bodies corporate (‘Insignia Financial Group’). The information in this article is current as at July 2022 and may be subject to change. This information may constitute general advice. The information in this article is general in nature and does not take into account your personal objectives, financial situation or needs. You should consider obtaining independent advice before making any financial decisions based on this information. You should not rely on this article to determine your personal tax obligations. Please consult a registered tax agent for this purpose. Opinions constitute our judgement at the time of issue. The case study examples (if any) provided in this article have been included for illustrative purposes only and should not be relied upon for decision making. Subject to terms implied by law and which cannot be excluded, neither NULIS nor any member of the Insignia Financial Group accept responsibility for any loss or liability incurred by you in respect of any error, omission or misrepresentation in the information in this communication.