Author: Holly Nahar

The recent global pandemic focused the minds of investors on the reality and urgency of addressing the climate crisis.

The last few years has shed light on just how unprepared we are to one of humanity’s greatest threats; the climate crisis. The Climate Crisis attributes to severe weather alterations, deforestation, food shortages and droughts. These are man made forces that are systemic and pervasive. These are issues that destabilize financial markets, interfere with investment portfolios and derail company supply chains and operations. These disruptions lead to widespread economic and social suffering.

In 2016, in a fast-tracked effort to limit global warming to substantially below 2 degrees Celsius, the United States, as well as 195 other countries signed the Paris agreement that requires economic and social transformation. This was done to ensure long-term low greenhouse gas emission development strategies backed by science.

In 2017, after just one year, the United States under President Trump’s administration pulled out of the Paris agreement on the premise that the US was supporting this accord financially more than other developed countries.

Centralized efforts to push companies to act environmentally conscious were wrecked due to this decision. Companies are among the largest contributors to carbon emissions. As a domino effect, they were now not held to any standard. They continued to pollute, destroy and never put back what they had taken and continue to take from the environment.
 
Environmental Change 
For 4.5 billion years, the physical, chemical, and biological processes that contribute to global environmental change have been shaping and reshaping the earth’s geographical features. In recent times, however, humans have been one of the driving forces of change on our planet. We have sped the process of climate change years ahead of our time by polluting, acidifying the air and invading our forests. We began to destroy the natural parameters that sustained life.

The methods by which we have done this include processes such as industrialization, and urbanization which are driven by human needs and wants; food, water, and shelter. The impacts of such large-scale needs and wants have resulted in unpredictable weather, shortages of food, water, and major health risks.

The interconnectedness of Financial Markets and Investment Portfolios to the Environment and Economic and Social Suffering 

We have reached a point of greediness and are fast approaching a point of no return. We have witnessed viral epidemics that blindsided the entire world and landed us in mild recessions. Most recently, the COVID-19 Pandemic.

In March of 2020, news broke about a virus that was spreading like wildfire. This caused financial markets to plummet 34% in just a few days of trading as the world entered lockdown. Companies that were not prepared for such catastrophic change declined in value as the strain of a worsening viral infection wreaked havoc on production. Supply Chains were affected as millions of workers were left unemployed and with low employee turn out, production levels decreased. Investment Portfolios declined greatly as markets plummeted and uncertainties about a recession loomed.

The Coronavirus crash of 2020 started as the pandemic began its spread in March and government officials around the world shut down economic activity. The panic triggered by economic consequences and uncertainty led to a crash that included the worst point drops in U.S history.

Although the origin of the coronavirus remains unknown, it is widely believed that it was spread by an animal. Attention to this is critical because it shows what deforestation can lead to. By clearing trees and invading habitats, animals have no choice but to co-mingle with humans. Diseases that are deadly and highly infectious can now be easily transferred to thousands each day, ultimately affecting the financial status and health of individuals.
Deforestation has been linked to the human need of food and shelter. However, without proper policies and regulations, companies, the manufacturer of these goods and services, will continue to tear ecosystems down and in the process, speed up the warming of our planet.

To rally like-minded individuals and create a plan of action, CERES, a nonprofit organization, called on hundreds of institutional investors, corporate executives, policymakers, and regulators to discuss strategies of the “ever-changing investment and business realities” so that we can thrive in an accelerated transition to a net-zero emissions future.
The discussions included targets for achieving Paris-Aligned Investment Portfolios, which seeks to strike a balance between emissions produced and emissions taken out of the atmosphere by seeking the appropriate action to engage and integrate sustainability not only on the operations side but on the supply chain as well. By doing this we are not only analyzing the risks of tomorrow, today, we are also weeding through potential opportunities for risk-adjusted returns.

Marcie Frost, CEO of CalPERS briefly discussed the importance of understanding your portfolio holdings and joining forces with a growing number of organizations and other stakeholders committed to supporting net-zero emissions. Through understanding your portfolio holdings, you can spot the risks that will potentially affect the valuation of a company. Working with others committed to net-zero targets will allow a proactive approach that eliminates potential company greenwashing.

Climate change is an investment risk. We want to de-risk portfolios and to do that we must require that companies be in conformance with our sustainable goals. These are ethical practices that should not be questioned. Under no circumstance should it be okay for a company to dump toxic waste in waterways, decrease the quality of life for a community all while holding the belief that their actions are acceptable to the majority. We must hold a futuristic approach to our portfolio and implement strategies that will smoothly transition us to the next generation.

Climate Change in Perspective: Water Impact on Portfolios
Water is the lifeline for people, plants, and animals. Because of Climate change, clean drinking water as well as droughts are two predominant water issues now arising in many areas. Australia is known as one of the driest places on earth. They have been dealing with water issues for many years. The aspects of droughts and floods have impacted their investment portfolios. Kelly Christodoulou, ESG Manager at AustralianSuper stated in 2020 wildfires in Australia were the worst ever on record. These fires burnt out an area the size of England. As a result, people became homeless, lost their businesses and it impacted the local society in general. This was caused by the many years of extreme droughts that Australia went through and is still going through. As such, assessing climate risk became integral to portfolios.

The assessment began with Australia’s five largest infrastructural assets. This included impacts of water or lack of water on assets. The Aussie equities portfolio assessment found that it was most exposed to either water stress, droughts, or being exposed to typhoons and hurricanes within the supply chain in Southeast Asia that caused these effects.

The water and climate coalition suggested that up to 187 million people could be forced to leave their homes as sea level rises above two meters. The idea that rising sea levels will force millions to move, unleashing a refugee crisis is no longer just an idea, it is now reality.

For investors, the impact of water presents both portfolio risks and opportunities. As shortages increase in frequency, local authorities as well as governments may impose regulations which would be financially bearing on company operations in a city, region, or country.

Investors may also choose to divert from companies that are not taking sufficient steps to ensure long-term sustainable growth. In the case of water impact, agricultural and tourism sectors may be vulnerable to sudden changes.

On the other hand, companies focused on evolving and resolving future crises may implement strategic plans to capitalize on directional trends. These companies will thrive in the long term and become drivers. If you look at Australia and the current trend of water scarcity, there is likely to be a substantial investment in infrastructure as the government and private sector seek to make major technological advances that solve the prevalent problems they face.

The climate crisis is interconnected with the environment, our financial lives, health and wellbeing. It falls within the interest of our economic and social lives and as people realize the interconnectedness of it all, we will be able to determine winners of this quickly developing trend.