Climate Risk: The Investment Opportunity Of Our Time

Climate change is a pressing issue that poses a number of risks to investors. These include physical damage to buildings and equipment, stranded assets, reputational risks, and pressure on natural resources. However, there are also opportunities for investors to aid the transition to a lower-carbon economy and mitigate climate change-related risks. Investors can consider investing in companies that support natural resource efficiency, resilient infrastructure, and sustainable agriculture. They can also look for opportunities in transitional infrastructure, such as climate-resilient real estate and financing for low-carbon technologies. Climate risk assessment methods are still developing, and investors need to navigate a complex landscape of organisations, regulations, and technical guidance to factor climate risk into their portfolios effectively.

How investors can factor climate risk into their portfolios

Climate change is a complex and dynamic issue that presents both risks and opportunities for investors. As the impact of a changing climate on global ecosystems, economies, and human livelihoods becomes increasingly apparent, investors are paying more attention to how climate change-related environmental and social risks could affect their portfolios.

When factoring climate risk into their portfolios, investors should anticipate higher volatility in industries and countries related to fossil fuels or exposed to extreme weather events. This includes considering investments in renewable energies, electric vehicles, and green bonds. Investors may also find opportunities in "transitional infrastructure", such as climate-resilient real estate and financing for low-carbon technologies.

To mitigate physical damage to buildings, supplies, and equipment due to flooding or other extreme weather events, investors can consider investing in companies that have products or services that support increased efficiency and resiliency of homes and buildings. This includes companies that help refit existing buildings or reinforce existing energy infrastructure, as well as those taking on new construction and infrastructure projects that are built to be more energy efficient and resilient to severe weather events.

Additionally, investors should carefully evaluate companies with operations in regions where food or water scarcity could be an issue and avoid investing if the risks are too great. Instead, they can consider investing in companies that support natural resource efficiency, resilient infrastructure, food and water security, and sustainable agriculture.

To navigate the complex landscape of organisations, regulations, investor networks, and technical guidance related to climate risk management, investors can refer to resources such as the investor resource guide by the PRI, which provides assistance at any stage of the climate risk management process.

The complex landscape of organisations, regulations, investor networks and technical guidance

Investors seeking to manage and disclose climate risk face a complex landscape of organisations, regulations, investor networks and technical guidance. For example, the TCFD updated its recommendations in October 2021; the following month, at COP26, the International Sustainability Standards Board (ISSB) was created to develop a global baseline of sustainability disclosure standards to meet investors’ information needs.

Climate risk assessment methods are still developing, and risks in some market areas, such as municipal debt pricing and real estate in coastal regions prone to extreme weather events, remain hard to quantify. Investors can factor in climate risk by anticipating higher volatility in industries and countries related to fossil fuels or exposed to extreme weather. They may also find opportunities in “transitional infrastructure” such as climate-resilient real estate and financing for low-carbon technologies.

Business risks tied to climate change include physical damage, stranded assets, reputational risks, and pressure on natural resources. Investors can consider investing in companies that have products or services that support increased efficiency and resiliency of homes and buildings. Potential investments include companies that help refit existing buildings or reinforce existing energy infrastructure. There are also opportunities to invest in companies taking on new construction and infrastructure projects that are built to be more energy efficient and withstand severe weather events.

Investors can also consider investing in companies that support natural resource efficiency, resilient infrastructure, food and water security, and sustainable agriculture. It is important to carefully evaluate companies with operations tied to parts of the world where food or water could be scarce and avoid them if the risks are too great.

Business risks tied to climate change

Physical damage to buildings, supplies, and equipment due to flooding or other extreme weather events can be costly. These events can disrupt business and supply chains by halting manufacturing or making it impossible for employees to get to work.

Climate change also presents new investment opportunities for those interested in aiding the transition to a lower-carbon economy. Investors can consider investments in renewable energies, electric vehicles, green bonds, and transitional infrastructure such as climate-resilient real estate and financing for low-carbon technologies.

It is important to carefully evaluate companies with operations tied to parts of the world where food or water could be scarce and avoid investing if the risks are too great. Investors can seek opportunities in companies that support natural resource efficiency, resilient infrastructure, food and water security, and sustainable agriculture.

Opportunities for investors

Climate change is an increasingly important consideration for investors. As the world moves towards a lower-carbon economy, investors can play an active role in mitigating climate change-related risks and supporting the transition.

There are a number of opportunities for investors to get involved in climate change mitigation. Firstly, investors can consider putting their money into companies that have products or services that increase the efficiency and resilience of homes and buildings. This includes businesses that help refit existing buildings or reinforce existing energy infrastructure, as well as those taking on new construction and infrastructure projects that are designed to be more energy-efficient and resilient to severe weather events.

Secondly, investors can seek out opportunities in "transitional infrastructure". This includes climate-resilient real estate and financing for low-carbon technologies.

Thirdly, investors can look for companies that support natural resource efficiency, resilient infrastructure, food and water security, and sustainable agriculture. It is important to carefully evaluate companies with operations in parts of the world where food or water scarcity could be an issue and avoid investing if the risks are too great.

Finally, investors can consider putting their money into renewable energies, electric vehicles, and green bonds.

How to identify and mitigate potential climate-related risks in your portfolio

Climate change is an increasingly important consideration for investors. As scientists warn about the negative impacts of a changing climate on global ecosystems, economies, and human livelihoods, investors are thinking about how climate change-related environmental and social risks could affect their portfolios.

Climate risk assessment methods are still developing, and risks in some market areas, such as municipal debt pricing and real estate in coastal regions prone to extreme weather events, remain hard to quantify. However, investors can factor in climate risk by anticipating higher volatility in industries and countries related to fossil fuels or exposed to extreme weather.

To identify and mitigate potential climate-related risks in your portfolio, consider the following:

• Anticipate higher volatility in industries and countries related to fossil fuels or exposed to extreme weather.
• Consider investments in renewable energies, electric vehicles, and green bonds.
• Look for opportunities in "transitional infrastructure" such as climate-resilient real estate and financing for low-carbon technologies.
• Evaluate companies with operations tied to parts of the world where food or water could be scarce and avoid if the risks are too great.
• Leverage existing portfolio products and solutions that address themes focused on climate change mitigation and adaptation.
• Advance key environmental United Nations Sustainable Development Goals, such as affordable and clean energy, industry innovation and infrastructure, and climate action.
• Consider investing in companies that support natural resource efficiency, resilient infrastructure, food and water security, and sustainable agriculture.
• Be aware of business risks tied to climate change, including physical damage, stranded assets, reputational risks, and pressure on natural resources.

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