For decades, experts have warned that the physical, economic, and regulatory risks posed by climate change could mean significant losses for investors. Consequently, investors have been debating how to interpret and measure climate risk in their portfolios and what actions can help safeguard investment from a risk and return perspective.
Certain key developments helped shift the climate conversation from debate to action and have created a new sense of urgency among investors. They include:
Clear manifestation of the physical impacts of climate change. As extreme weather events have become more frequent, the physical impacts of climate change have become more visible and obvious. In Australia, for example, it is predicted that the impacts of prolonged drought on the agriculture sector caused by changing climate patterns over the last few years may reduce Australia's GDP by a full percentage point over a two-year period.1
Quantification of economic risk. In November 2018, a report published by 13 United States government agencies drew widespread attention. It warned that without significant steps to address global warming, annual losses in some economic sectors could reach hundreds of billions of dollars by 2100.2
Climate regulation. Overhaul of the European legislative framework directly impacts investors as Europe begins to operationalize the Paris Climate Agreement.