Speakers from the UK, Hong Kong and Sydney joined us for the FSC’s recent under 35s Circuit event on investing and the influence of climate change on global markets.
Emily Woodland, Head of Sustainable Investment, AMP Capital joined the session from Hong Kong to discuss how climate change influences the financial services sector and what role investors play in addressing climate change – especially in light of our volatile year to date. Here, Emily addresses some questions on the topic.
What impacts has the COVID-19 crisis highlighted in terms of climate change from an investment perspective?
The COVID-19 crisis has highlighted the influence of non-financial factors becoming increasingly integral to assessing long-term business resilience.
Policymakers now have an unprecedented opportunity to provide economic stimulus plans that facilitate sustainable social and environmental development.
In terms of climate change and emissions implications, we've obviously seen a huge drop in air travel and industrial activity. While this may have temporarily reduced global carbon emissions and yielded cleaner skies, it is a little bit of short-term relief. Achieving it at the expense of such sudden and violent disruption is neither desirable nor sustainable. And we may see permanent changes in the manner or frequency in which certain activities are undertaken in business travel or tourism or even the supply chains for certain goods, but other drivers of emissions may quickly return to business as usual.
This crisis has actually provided a real warning shot across the bow for companies in terms of how they're going to manage major societal disruptions. And COVID-19 has really strengthened the case for companies to undertake things like rigorous Task Force on Climate-related Financial Disclosures (TCFD) disclosures, proper resilience planning in a time of crisis, real stress testing and scenario analysis around their operations.
On the flip side, there are potential investment opportunities. Some projects such as renewable energy, green infrastructure – you may see temporary delays – but their long-term growth prospects still remain intact because their technologies and economic competitiveness continue to improve.
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Often, the climate change discourse is very focused on energy mix, on emissions from fossil fuels. But of course, there's also a number of other implications of climate change isn’t there, like food and water supplies?
It's my experience that companies are particularly focused, rightfully so, on things like climate change disclosures, transition risks, and emissions mitigation, and that is absolutely important to the low-carbon transition.
But there's still a certain amount of complacency around the adaptation to physical risks in particular, which does include water stress. And unfortunately, there is going to be a certain amount of physical risk, regardless, because we're already heading down that journey of a warming climate.
Climate change manifests itself to a great degree through the global distribution of water resources. In some places, there's too much, and in other places that there won't be enough. And this can impact companies either directly or through their value chains.
We're even seeing this happen in Australia now. Water issues are starting to impact company operational outcomes. We saw this happen in the reporting season, even over the last year, and that's before companies even finished wrapping their heads around how to do comprehensive TCFD reporting and scenario analysis. In order for that TCFD work to be really helpful, it needs to be used in its proper context to inform action and strategy around how it's going to manage these risks. And that's not just on mitigation and commitments to emissions reductions, it's also on adaptation.
My duty is to consider all the material risks to the portfolios I manage on my client's behalves. We think about these types of issues in terms of their potential impact on drivers of company value and the long-term sustainability of the companies that we invest in.
The challenge is that water risk is not always obvious in company disclosures, and that can make that work somewhat challenging at times. Australia saw some pretty unprecedented droughts in 2019. The Bureau of Meteorology classified the drought in the Murray-Darling Basin (MDB) as the worst on record. And the MDB feeds the cities of Sydney, Melbourne, Adelaide, Canberra, Brisbane. At one point last year, the water storage reserves actually stood at or near historically low levels in some areas. In those regions, there's a lot of agriculture. There's also a lot of water-intensive industries competing for resources.
While droughts are a common feature of Australia's history and certainly played a part in the bush fires, climate change is predicted to continue to increase drought frequency and severity. That can have material impacts on sectors such as agriculture and the whole value-chain there, the mining sector, utilities, even the financial sector through its lending and insurance activities. We'll think about the physical risk to our portfolios, potentially even stranded asset risks, regulatory impacts, how we're engaging with companies on these issues, but also what potential investment opportunities might be related to water as well.
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