{"id":8349,"date":"2023-07-11T10:36:21","date_gmt":"2023-07-11T10:36:21","guid":{"rendered":"https:\/\/sarasinandpartners.com\/row\/think\/too-hot-for-growth\/"},"modified":"2023-12-14T16:01:15","modified_gmt":"2023-12-14T16:01:15","slug":"too-hot-for-growth","status":"publish","type":"post","link":"https:\/\/sarasinandpartners.com\/row\/think\/too-hot-for-growth\/","title":{"rendered":"Too hot for growth?"},"content":{"rendered":"

Despite abundant evidence of the damage implied by climate change, markets are still underestimating its effects. A global thematic lens and climate risk analysis of companies keep our focus on the long-term opportunities for investors.<\/strong><\/p>\n

The latest research shows the world is about 1.6\u00b0C warmer over land masses than it was during the pre-industrial age. Our current trajectory takes us towards 3\u00b0C of warming by the end of the century.[1]<\/a><\/p>\n

To grasp the potential economic impact of our current climate trajectory, it helps to consider what might happen to economic growth under different scenarios. Research[2]<\/a> shows that even if we achieve net zero by 2050, current growth forecasts could be 4% too high. This could be much worse.<\/p>\n

If we choose not to address climate change, current growth forecasts could be almost 20% too high.<\/p><\/blockquote>\n

Governments are increasingly waking up to what is at stake, making policy responses that force change a near inevitability. It is also clear that companies and investors should consider the risks, as well as the opportunities, that climate change presents.<\/p>\n

A $6 trillion wave of investment opportunity<\/strong><\/h3>\n

To achieve the targets of the Paris Climate Agreement, we need to reduce CO2<\/sub> emissions very quickly. This could result in the largest wave of capital investment yet seen in human history.<\/p>\n

Spending to address climate change was approximately $680 billion in 2021. According to the Intergovernmental Panel on Climate Change and other estimates, we must increase annual climate-related spending by several orders of magnitude if we are to keep global warming to below 2\u00b0C. While projections vary, it is estimated that we will need to reach annual climate spending of $6 trillion by 2040, and to continue to invest at this level [3]<\/a>.<\/p>\n

This gives a sense of the sheer scale of the investment opportunity available, as capital is deployed across the world to make the transition to low carbon. How we source and use energy must clearly change, but we must also invest significant capital in all areas of the global economy, from clean transport to sustainable buildings, agriculture, materials and digital technology.<\/p>\n

Why do markets misprice climate change?<\/strong><\/h3>\n

We know the risks associated with climate change and we know the scale of the investment opportunity. It therefore seems strange that markets are still mispricing climate change and the transition to low carbon. Despite decades of discussion about climate change, the ratio of fossil fuel investment to renewable energy investment, at 0.9, is still very low.[4]<\/a><\/p>\n

This could be down to how capital markets operate, low data availability and psychological biases. Capital markets are not used to dealing with the sudden, significant changes that may occur with global warming, such as climate tipping points. Nor are they equipped to deal with the uncertainty and long time periods involved in climate change analysis.<\/p>\n

Indeed, a lack of data about current emissions and how climate change could affect businesses, together with a focus on short-term investment performance, draw attention away from the implications of failing to transition to low carbon. This feeds a deeply human flaw: hyperbolic discounting. We prefer to receive rewards sooner rather than later, while downplaying risks that appear to be far in the future. Unfortunately, the reality is that climate change is already having an effect \u2013 and in many instances, significantly more quickly than anticipated.<\/p>\n

Investors may also have a beat-the-gun mentality: they appear to see the risks of investing in specific stocks and sectors, but believe that they will be able to profit from and exit their positions before the rest of the market does. They cannot all be right.<\/p>\n

Forward-looking analysis to identify risks and opportunities <\/strong><\/h3>\n

Simply excluding companies with high CO2<\/sub> emissions from portfolios is an effective way to reduce the carbon footprint of a portfolio, but it has little impact on the real world. Less choosy investors, who are unlikely to press the company to reduce its emissions, may buy an excluded company cheaply. For this reason, we engage with companies to push for beneficial change, often in concert with other aligned investors.<\/p>\n

It is also vital to develop analytical approaches that match the complexity of climate-related issues. For example, carbon footprinting \u2013 which is widely used to track companies\u2019 carbon intensity \u2013 shows only part of the overall picture. Among other things, it tends to ignore scope three emissions. These are produced as result of a company\u2019s activities by its suppliers or customers. In the case of oil and gas firms, some 90% of their emissions are scope three.<\/p>\n

Carbon footprints also give a static snapshot in time. As asset managers committing our clients\u2019 capital to long-term investments, the direction of travel is crucial. Our focus is not on where emissions are today, but where they are likely to be in future based on how companies are allocating capital to mitigate climate risk.<\/p>\n

A forward-looking approach is therefore key to our climate value at risk (CVaR) analysis of companies. By combining CVaR with more conventional financial and qualitative analysis, we integrate climate-related variables into our analysis, including emissions, carbon pricing and exposure to risks such as rising sea levels.<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Despite abundant evidence of the damage implied by climate change, markets are still underestimating its effects. A global thematic lens and climate risk analysis of companies keep our focus on the long-term opportunities for investors. The latest research shows the world is about 1.6\u00b0C warmer over land masses than it was during the pre-industrial age....<\/p>\n","protected":false},"author":14,"featured_media":14112,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[142,9],"tags":[],"coauthors":[87],"class_list":["post-8349","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-house","category-stewardship-thoughts"],"yoast_head":"\nToo hot for growth? - Sarasin & Partners Global<\/title>\n<meta name=\"description\" content=\"Ben McEwen outlines how we analyse and select companies that will benefit from the $6 trillion annual investment needed to help mitigate the impact of a warmer world on our potential economic growth.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/sarasinandpartners.com\/row\/think\/too-hot-for-growth\/\" \/>\n<meta property=\"og:locale\" content=\"en_GB\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Too hot for growth? 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