19 Dec 2023

Scalding reminder after hottest summer on record

This article was first published in the Financial Times.

After experiencing the hottest summer on record, investors were given a reminder of the impact of climate change. Investors must consider climate risk when thinking about portfolio construction.

Physical climate risk refers to economic costs and financial loss associated with a changing climate. Acute physical risk drivers include increased frequency or severity of climate and weather events (e.g., floods, wildfires, tropical storms, etc.). These climate change induced events can result in an array of catastrophic impacts on human life as well as physical damage to property, supply chain disruptions and scarcity of key inputs. Extreme weather is a cause of global productivity concern.

The scale of the challenges created by climate change and the associated risks has spurred a host of decarbonisation commitments by governments and companies. Most nations are committing to national and international agreements such as the Paris Agreement aimed at limiting global warming. This is translating into a need for an estimated $9.2 trillion in annual spending to achieve net zero by 2050 - and therefore an enormous investment opportunity.

Solutions will be needed to help companies and countries to move towards less carbon-intensive ways of doing business. Across sectors and geographies, scientific breakthroughs and technological innovation are responding to this demand for solutions, presenting an opportunity to invest in the creation and adoption of these solutions.

Let’s look at European real estate as an example. According to the EU, buildings are responsible for 40% of energy consumption and 36% of greenhouse gas emissions. The European Commission has estimated that almost €300 billion of investment will be required to reach targets with implications for companies throughout the supply chain. This increased spending could see potential upside of close to 30% on operating profits for a typical building materials company - in one year alone. Examples across other sectors are endless.

There are a variety of ways to gain exposure to these trends. But investors need to think fast.

At J.P. Morgan Private Bank, our client’s goals are paramount. We’ve been encouraged by how these have evolved in recent years. Those clients with established investment philosophies are becoming more aware of the challenges that climate risks pose to their portfolios. Ultimately, investors want to pick the companies with the most sustainable business models – more and more they understand that climate risks threaten that ambition. Our clients are also more hungry than ever for education and analysis around climate themes.

We have seen clients eager to go beyond just considering the financial risk but investing in impact solutions that have the greatest potential for a sustainable future while aiming to provide financial returns. Our impact team focuses on offering solutions to support the transition towards less carbon-intensive ways of doing business. These are areas like agricultural technology, energy efficiency, sustainable water use, alternative fuels and materials, and the renewable energy transition. Investors should consider an active approach to investing in this area, working with managers who can understand this complex landscape and potentially drive returns over the medium to long term.

When it comes to philanthropic efforts, our clients care passionately about climate change. When we asked our clients earlier this year about which causes were most important to them, climate change ranked in the top five. We work alongside philanthropists to provide actionable strategies such as introducing a climate lens to existing giving, and peer to peer connections to facilitate shared learning.

We’re seeing an uptick in pledged capital here and we’re confident that this trend will continue, alongside an increasing desire to look beyond traditional approaches to grantmaking by utilising venture philanthropy. This is particularly relevant when it comes to issue areas such as the climate crisis, which requires the combined action of many groups.

Private Capital has a significant role to play in supporting the transition to a low-carbon and sustainable economy. We have seen notable product developments come from Guernsey and other financial centres which can offer attractive potential financial returns, resilience and sustainability for portfolios, whilst tackling the climate crisis.

Diana Robinson appeared at the Guernsey Private Wealth Forum in London on 2 November where she was a panellist discussing A changing world; market trends and their impact.