Shivani Patel: Climate change is a critical theme in ESG integration. It’s a sophisticated issue encompassing many material trends that are critical for both investors and the companies we invest in to understand.
The primary issue I would highlight for anyone in thinking about climate change is that its impact if left unchecked, that is the increase in severe weather events and the chronic changes in weather patterns that would occur, will have such widespread implications in society that it would be a threat to the stability of the global financial system as outlined by the Financial Stability Board and increasingly by central banks around the world.
That’s really why there’s such a focus on this topic across the board by regulators, investors, our clients, the companies we invest in and beyond. At a high level there are two parallel themes for investors to track on climate change. The first is related to how the corporate sector participates in the mitigation of climate change through emissions reductions. How do companies plan to minimize carbon emissions across their value chains or which solutions will they build that will be relevant in the transition to a low carbon economy?
The second is about understanding the delta between the ideal temperature change scenario, which is achieving net zero emissions by 2050, and the actual trend line of emissions reduction and temperature change. Tracking the reality of the environmental implications will be critical to companies mitigating risk and capitalizing on opportunity optimally.
In the tech sector, data center technology that is developed to produce significant energy savings could enable customers to lower their value chain carbon emissions. The energy savings could result in reduced energy costs, and those savings could also get passed through to the consumer as a competitive advantage.
In the consumer sector, a company could set a science-based target to reduce its emissions and in measuring the company’s carbon footprint the management team could realize that one of the key contributors to emissions is in its packaging. That would trigger the company to rethink the materials it uses in packaging and how much of that material is new virgin material versus recycled material.
In the industrial sector, a building materials company could track the reality of climate change and identify the temperature change will be more severe than the 1.5 to 2 degrees targeted in the Paris Accord. The management team could identify that as an opportunity to develop roofing products that are significantly more resilient to severe weather, creating a competitive advantage for that company over time.
As investors, tracking the emerging and evolving best practices and solutions across sectors is critical to developing insights. Regulation is also playing an increasingly substantial part, even for U.S. companies. This is a new and exciting area of analysis and will produce a broad range of both risks and opportunities to incorporate into investment analysis.