Five Ways Climate Change is Affecting the Investment Landscape
When the Intergovernmental Panel on Climate Change released its Sixth Assessment Report on the catastrophic effects of climate change, it hit like a figurative lightning bolt. As more and more severe weather events occur around the world, investors and businesses alike are being forced to confront the realities of a changing climate.
Business disruptions from catastrophic weather events are nothing new, but the accelerated pace at which they are occurring has brought renewed focus to how businesses are planning to address future climate change.
How businesses navigate the upcoming decade may determine their long-term viability. But how they lay the groundwork in the short term can have an immediate and positive impact with investors and other stakeholders.
Even though serious climate change warnings have been happening for more than 30 years,  many companies have been resistant to the idea that they need to respond. Others have acknowledged the need but have done the bare minimum (or worse) to address the threat. But pressures from governments, investors, employees and consumers alike are beginning to build, and the costs from the very real effects of climate change-influenced weather events are mounting.
How can companies navigate a future that, while still uncertain, is increasingly coming into focus? Here are five ways climate change is a factor in the investment landscape.
Real assessment of risks. Looking at a company’s entire climate impact is key. It’s no longer just about energy companies and polluting factories. Elements like water use and biodiversity efforts are also scrutinized. Consider also the sector a company is in. While all companies will be affected by climate change, some of them will be impacted more by regulatory agencies looking to mitigate climate concerns. Past efforts to acknowledge the crisis are no guarantee, but companies that are further along in the process may be more likely to be able to adapt quickly to new threats. Similarly, the acceleration of threats means that old modeling techniques may be insufficient. Companies need to make sure their climate modeling is up to date, including both long range climate risk scenarios and more immediate catastrophe models.
Disclosure is just the beginning. Disclosures are important, but they are just the start. As more companies embrace the Task Force on Climate-Related Financial Disclosure (TCFD) framework for sustainability, they are realizing the opportunities these disclosures create. For starters, it allows companies to outline their overall climate strategy in clear terms for investors and other stakeholders. There is also a competitive advantage being an early adopter of these types of disclosure, leaving competitors to looks like followers instead of leaders. It’s also a good way to stay a step ahead of regulators, further burnishing the company’s reputation as a leader. But disclosure of plans doesn’t mean much if the plans are not realistic or actionable. That can be tricky, since some technologies that companies will rely on heavily is in the early stages, or in some cases doesn’t exist commercially yet.
Don’t just check boxes. Real sustainability looks deep within an organization. Companies that do the hard work of real sustainability planning will be rewarded as more robust Environmental, Social and Governance (ESG) plans become widely expected. A company’s ESG work can be a leading indicator of their commitment to a sustainable future. Conversely, flimsy plans with vague goals, few specifics and dubious efficacy open a company up to the charge of “greenwashing,” which refers to companies that want credit for their sustainability accomplishments without feeling the need to actually do anything to deserve it. Greenwashing can be something as simple as placing nature scenes on a product label to give the appearance of environmental responsibility, or it can be something as elaborate as cheating regulators while hailing a product’s reduced emissions. In any case, companies that get exposed for greenwashing face hurdles in their ongoing ESG planning, as they need to first rebuild their credibility in the space. Ensuring that plans have measurable goals that will accomplish something meaningful should be the focus.
Seize opportunities. As one expert put it, the companies that thrived during the gold rush were the ones selling the buckets and shovels, not the ones panning for gold. Companies that use new or emerging technologies to decarbonize (rather than just focusing on reduction of existing emissions) will be successful, while the companies actively involved in developing these new technologies will be the ones to reap the biggest rewards.
Develop a culture of sustainability. A true culture of sustainability will allow investors and companies alike to work toward the goal of climate change mitigation while also maintaining profitability. The “green premium” will become a thing of the past if companies invest not in short-term fixes with little hope of making a difference, but in longer-term strategies that work to permanently instill a culture of sustainability.
As the climate continues to change, both investors and companies that want to brand themselves as focused on sustainability will want to be involved with others who are focused on sustainability. As such, investment vehicles are being created to meet the needs of investors and companies alike that want to align with sustainability value.
Funds like the Aon Global Impact Fund were created to encourage positive change in the environment and beyond. But beyond good public relations, these investment vehicles are a good way to identify companies that are taking their commitment to the “E” in ESG seriously.
 Sixth Assessment Report (ipcc.ch)
 The Changing Atmosphere: Implications for Global Security
 How Big Oil Misled The Public Into Believing Plastic Would Be Recycled