The latest scientific evidence leaves no doubt – human-caused greenhouse gas emissions from burning fossil fuels are driving severe climate change impacts at an alarming rate. This global crisis carries major financial implications that investors cannot afford to ignore.
- Climate Risks Facing Investors
- Climate-related risks can be divided into two main categories:
- Physical Risks
Increased frequency and severity of extreme weather events, rising temperatures and sea levels
Potential for damage to companies’ facilities, properties and supply chains
Higher operating costs and capital expenditures to address physical impacts
Transition Risks
- The global shift away from carbon-intensive fossil fuels to a low-carbon economy
- Regulatory changes like carbon pricing and emissions limits
- Costs of adopting new clean technologies and aligning business models
- Changes in consumer preferences toward sustainable products/services
If not adequately prepared, climate change poses systemic portfolio risks that could wipe out 11-14% of global GDP by mid-century. However, the race to net zero emissions also presents major investment opportunities.
The Opportunity in Sustainable Investing
To meet the Paris Agreement goals and limit global temperature rise, the International Energy Agency estimates clean energy infrastructure investments must triple to $4 trillion annually by 2030. This includes renewable power, energy efficiency, emissions reduction technologies, and clean energy innovation.
Sustainable investing is rapidly going mainstream, with European investors alone pouring over €20 billion into sustainable funds in 2021, taking total assets past €1.3 trillion. Regulations like the EU’s Sustainable Finance Action Plan are driving this momentum by reorienting capital flows toward sustainable investments aligned with long-term net zero goals.
While climate change is a systemic risk, it is also fueling one of the biggest transitions and investment opportunities in modern financial history. Investors have a critical role in advancing the low-carbon transition and mitigating climate risks within their portfolios. Those positioning accordingly can be a powerful force for positive change while accessing an emerging multi-trillion dollar market opportunity.
