Institutional investors must recognize the risks and opportunities presented by climate change and national efforts to mitigate it, says Jaakko Kooroshy, head of sustainable investment research at FTSE Russell.
“Climate-related physical and transition risk threats to the global economy are real,” says Kooroshy, who leads a team that recently published a paper on the carbon reduction strategies being pursued by G20 countries. “It’s important that investors take them into account. They are shifting profit pools and the valuations of assets. How you do that best is an open question.”
The report found G20 member countries have each established targets for 2030 and net-zero strategies for 2050. In most cases, the rate of reduction required to meet these 2030 goals won’t be steep enough to reach the 2050 goals.
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At their current pace, just eight economies are on track to reduce emissions enough to prevent temperatures from rising more than two degrees around the world. Only seven G20 members’ 2030 are aligned with the Paris Agreements’ goal of limiting global warming to below two degrees. “At the other side, Canada and Australia are aligned for about three degrees and Russia and Saudi Arabia are closer to four.”
The FTSE team concluded temperatures would rise by 2.2 degrees if these country’s carbon reduction trajectories continue at the same speed required to reach their 2030 goals through the next two decades. The gulf between Canada’s 2030 goals and 2050 targets is larger than in any country in the world and would imply 2.4 degrees of warming. “There’s still a huge amount of work to prepare us for climate change. Even if we do limit global temperature rises to 1.5 degrees, we’re in for a bumpy ride.”
While Canada isn’t leading on the carbon-reduction front, it could face more significant consequences than most other countries. “The closer we get to the poles, the more heating we see. In the northern parts of Canada, we see warming above six degrees. . . . We won’t see those extremes in the south, where the major cities are, but it will see much more warming than other G20 countries and more frequent extreme weather events.”
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For institutional investors in urban real estate, the frequency of extreme weather events will present a significant challenge. According to Florian Gallo, a senior research lead for physical risk at the London Stock Exchange Group, institutional investors need to realize that mitigating the impact of these events will require more than making upgrades to individual buildings.
“Improving a building to face a climate event is really expensive,” he says. “Improving the way we organize cities will be at the heart of preparation. . . . But we’ll see places in North America that won’t be insured any more and it’s unclear how cities, sub-national and national authorities will respond.”
The hardships facing farming regions, including California’s Central Valley and the Canadian Prairies, will also present increasingly difficult challenges for institutional investors involved in the agricultural sector. “You will see some regions become more hospitable as things get worse elsewhere,” says Kooroshy. “In some places, you will see more extreme events, including serious droughts.”
However, the hardships facing these agricultural regions may provide a source of opportunity to institutional investors, says Gallo, noting the the promise of new arable land shouldn’t lead investors to give up on established farming regions. “Rather than looking for new dream regions to grow crops, it’s way more efficient for investors to improve the resilience of existing regions. Investing in drought resistant crops is more efficient that investing in mega water storage facilities.”
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