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2019 Investment Forum – Forecasting climate change (2/5)

More and more, climate change is recognised as a disruptive force, both for the global economy as a whole and for investors. At the BNP Paribas Asset Management 2019 Investment Forum, our Global Head of Sustainability, Jane Ambachtsheer, and Head of Climate Change Investment Research, Mark Lewis, presented their views on forecasting climate change over the next three and 30 years.

Though the Paris Agreement targets a rise in global temperatures of well below 2°C, current policies have us on a path to a 4°C increase, with significant (negative) consequences. These include:

  • extreme heat waves
  • an increase in the sea level of up to nine metres (which would put 470-760 million people at risk)
  • major risks to global food security
  • half of all plant and animal species facing extinction
  • 35-122 million more people living in extreme poverty.

Governments will act when science, economics, technology, and public support align, but the critical questions are when will it happen, and how will it happen, in a smooth and coordinated manner or in a delayed and disruptive one?

The impact on industries and financial markets from climate change

Importantly, financial markets are underprepared for climate-related policy risks and as governments are forced to take action, investor portfolios are exposed. We must ask ourselves how their policies will affect the economy, which sectors are most at risk, and which asset classes will be impacted.

Some of the industries that we believe will be affected:

  • energy / utilities – coal will be phased out, oil use is set to peak, renewable energy generation is rising[1]
  • cars – internal combustion engines are facing bans and electric motors are set to replace them
  • construction – energy efficiency standards for homes and offices will rise and existing structures will need to be refitted
  • land use / agriculture / forestry – productivity must increase to offset an end to deforestation; eating habits are moving away from beef
  • consumer sectors, particularly consumer staples – the use of plastic in many of their products is likely to face ever greater restrictions.

Exhibit 1: Sectors which stand to lose from the transition

Exhibit 1: Sectors which stand to lose from the transition

Source: Carbon Tracker; November 2019

Exhibit 2: The transition will create winners; consumers should benefit from falling energy prices

Exhibit 2: The transition will create winners; consimers should benefit from falling energy prices

Source: Carbon Tracker; November 2019

The key message from Jane Ambachtsheer and Mark Lewis: there will inevitably be a policy response from governments to mitigating and adapting to climate change as the impact on their citizens becomes ever greater.

This is part 2 of the Investors’ Corner series on the main points from the four keynote speakers at the BNP Paribas Asset Management 2019 Investment Forum on the theme of disruptive change in a superstar economy.

[1] In our report Wells, Wires, and Wheels: EROCI and the Tough Road Ahead for Oil, Mark Lewis explains why oil will need a much lower long-term breakeven price to remain competitive for transportation. Such a lower price will sharply reduce the future return on investment in the industry and the amount of stranded assets will rise.

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Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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