Paris climate summit 2015

Paris conference success essential for world’s climate and investor portfolios

High-polluting sectors are expected to pour money into upgrading operations and cutting emissions

PUBLISHED : Thursday, 03 December, 2015, 11:59am
UPDATED : Thursday, 03 December, 2015, 4:21pm

As foul air drive Beijing residents indoors and world leaders meet in Paris to talk climate change, the threat of further man-made environmental destruction, and the potential to reverse it, are already starting to weigh on investment portfolios.

That adjustment in investor outlook will be driven by the trillions of US dollars in clean-tech investment analysts expect will be spent in the decades ahead as governments grapple with the impact of off-kilter weather patterns and rising sea levels on food supplies and low-lying residential areas.

Asset prices will also be affected by mooted changes to how companies curb their carbon output with high-polluting sectors like autos, pulp and paper, and utilities, among others, all expected to pour money into upgrading operations and cutting emissions.

And in certain sectors like mining, investors are already voting with their portfolio account, divesting more than US$2.6 trillion from fossil fuel companies as of September this year, according to Arabella Advisors.

Investors are becoming an increasingly important actor in ensuring the success of the transition to a low-carbon economy and avoiding stranded-asset risk
Bank of America Merrill Lynch analysts

“Without action, the global mean cost of climate change could rise to 1 per cent to 5 per cent of gross domestic product per year – with emerging markets and the poor to be hit hardest,” Bank of America Merrill Lynch strategist Sarbjit Nahal and his colleagues wrote recently, adding that global weather-related losses had already averaged US$200 billion a year over the past decade, .

For investors that could translate into a 45 per cent loss on the typical global portfolio by 2020, while average annual returns would erode by between 26 per cent and 138 per cent by 2050, Bank of America Merrill Lynch data indicates.

Much will depend on the results of the ongoing Paris talks, where governments are trying to thrash out a deal on emission-reduction targets, implementation strategies, and the financing needed to achieve them.

The near-term beneficiary of any coherent agreement will be insurers, given the sector’s long-term negative outlook based on mounting catastrophic losses. Other sectors at greatest long-term risk include agriculture, energy, financial services, travel and tourism. On a broader, macro scale, climate change would also hurt sovereign credit ratings, Standard & Poor’s credit analyst Marko Mrsnik said, with government finances in Caribbean countries, Thailand and Vietnam the most likely to be strained from an increase in the frequency of floods and tropical cyclones.

“The additional climate change damage caused in richer countries is on average more moderate. Their higher level of preparedness, including insurance coverage, further reduces the economic and rating impacts for that prosperous group,” Mrsnik said.

Any deal at Paris will still come with costs for many sectors bound by national pledges and reform programmes to try to reduce emissions.

“(Agribusiness) will have to make substantial changes to its production methods – both to reduce emissions (especially methane from livestock and from fertiliser use) and to adapt to climate impacts (as yields may decline; there may be more droughts and floods),” HSBC analysts wrote in a recent report on the ongoing Paris conference.

“We think companies which are developing more sustainable and more efficient growing methods or potentially designing more resilient crop strains could benefit from the transition to a low-carbon economy.”

Investment in low-carbon energy – including wind and solar power plants, batteries and storage technology to power buildings and electric cars, and hydro power, among others – is expected to reach US$13.5 trillion between 2015 and 2030, presenting opportunities for investors in these sectors, Bank of America Merrill Lynch analysis shows.

“Investors are becoming an increasingly important actor in ensuring the success of the transition to a low-carbon economy and avoiding stranded-asset risk,” Nahal and his team wrote.

A key player to any successful outcome from Paris will be China, a country where the impact of poor environmental planning is felt on a daily basis through poor air and poisoned soil, and where government ministers have argued that rich countries should foot the bill for the global clean up.

One of the biggest carbon emitters, it is pouring money into nuclear and renewable energy sources, while at the same time targeting an ambitious 60 per cent to 65 per cent reduction in “carbon intensity” from 2005 levels by 2030.

But like other fast-developing countries now struggling to adjust to more sluggish global demand, China’s central government will have to choose between “the temptation to create short-term growth at the expense of long-term climate goals”, Jost Wubbeke and Bjorn Conrad of the Mercator Institute for China Studies wrote last month.

To make any climate reforms work, countries need to ensure employment rates do not fall as economies “focus on the challenges of short-term green job creation”, Wubbeke and Conrad wrote. Any fall in employment would dampen enthusiasm for change and hasten a climate “backslide”.