Climate change is a risk to your investments and retirement

This article, written by our Strategy & Operations Manager, Greer Blizzard, first appeared in INCE|Connect on 23 August 2018.

The risks that climate change poses to listed companies are ultimately financial risks to shareholders, especially those who are invested in pension funds. The growing incidence of such risks being realised is a very real threat to shareholder value, especially when it comes to long-term investing and meeting retirement expectations.

The risks associated with climate change are multifaceted. The most widely recognised one – physical risk – is broadly the risk of physical damage that a company is exposed to as a result of extreme weather events. This could be structural damage to a company’s operations or supply chain. It could be the impacts of flooding on a nearby community that supplies a company with its workforce, or supply disruption of a key product ingredient, a reality many Cape Town businesses still face as they navigate the aftermath of the worst drought in over a century. Recent examples elsewhere include the record-breaking heatwave that has stifled much of the northern hemisphere in the last two months, impacting health, agriculture and infrastructure.

Transition risks include increasing pressure from international bodies and governments around the world to speed up the transition to a low-carbon economy. The Paris Agreement poses an overarching transition risk to carbon-intensive companies: governments must take steps to comply with their commitments to reduce carbon emissions, and these steps will involve regulatory pressure on companies with high greenhouse gas emissions.

Less obvious, but increasingly likely, are liability risks posed by the possibility of climate litigation and damages, brought against companies which have contributed to climate change, and/or failed to mitigate their emissions or adapt to the demands of a low carbon economy, causing shareholder losses.

These very real financial threats make shareholders and individual savers vulnerable: many of the companies which make up significant percentages of the average South African investor’s portfolio are potentially subject to events which could rapidly diminish their value. But how many are even aware of these risks? How many are asking questions of their financial advisors or asset managers about the carbon footprint of their portfolio? Or the risk posed to their retirement funds by investments in fossil fuel companies?

Active ownership
There are many opportunities available to shareholders and individual savers, to help them ensure their investments are sustainable in the long term. Active ownership encourages an active relationship between shareholders and their financial advisors or asset managers, or even with company management directly.

The first step is a very easy one: asking a few simple questions of your asset manager or financial advisor about which companies you are invested in, and how much exposure you have to climate risk.

Engagement between civil society organisations and various investment industry actors on the topic of responsible investing in South Africa tends to end with the same rebuttal: the barrier to change is laid squarely at the door of shareholders, with asset managers claiming that there is no interest or demand from their clients. Can it really be true that South African investors do not care about climate change?

By asking your asset manager or financial advisor those few simple questions, you’ll be sending a message that you do care about climate change and about how the companies you are invested in are dealing with the many risks that it poses to your future, and the future of your children.

This is not an issue that we can afford to ignore any longer. As many international leaders in the fields of science, finance and business have emphasised, the longer we leave it to take action, the more devastating the consequences will be, and the harder it will be to mitigate them. Christiana Figueres, until recently Executive Secretary of the UN Framework Convention on Climate Change, made it clear that “bending the curve of emissions by 2020 is the only way to limit global warming”. As a significant contributor to global carbon emissions, South Africa’s failure to act will reduce the global chances of limiting temperature increases in accordance with the Paris Agreement.

Neither our government, nor our private sector, is acting fast enough to mitigate carbon emissions or prepare for the impacts of climate change. This failure to act is a direct risk to your investments, and a direct risk to the chances of prosperity for your children. Do something now, however small or seemingly insignificant, to end this dangerous inertia.

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