Changing Investment Risks and Opportunities – the impact of Climate Change

Climate change is fundamentally changing the nature of investment risks and opportunities. It is a real economic and financial concern for investors, whose capital, assets and reputations are increasingly vulnerable to climate risk. Investors must take steps now to consider not only the risks, but investment opportunities, created by climate change. Join Clyde & Co and Queen Mary University of London’s climate change conference on 23 March 2022 to explore how.

Climate risk is typically categorized as physical, transitional or liability risk. Each attracts varying levels of investment risk (the potential for investments to generate unexpected returns or outcomes, including whole or partial losses) and investment uncertainty, depending on context. Both investment risk and investment uncertainty negatively impact investment landscapes and portfolios.

Physical Risk is the possibility of weather and climate-related natural disasters – such as floods, storms, droughts, extreme heat, wildfires and rising sea levels – damaging assets, affecting asset prices, destroying buildings and infrastructure, disrupting supply chains, and impacting business-as-usual. Investors are concerned about rising costs associated with the increasing frequency, intensity and unpredictability of such events and the consequential impact on investments.

Transitional Risks arise from the transition to a low-carbon economy and potential costs (pecuniary and otherwise) of compliance with new climate policy, laws and regulations. Financial and reputational transition risks flow from technological developments and shifts in consumer and business behaviour towards cleaner and more ethical practices, which may leave investors with stranded, unfavorable or ‘dirty’ assets. Stranded asset transitional risk arises when assets (such as equipment, plants and infrastructure) experience unanticipated write-downs, devaluation or conversion to liabilities due to the transition to net zero. The introduction of increasingly onerous climate-related corporate governance, disclosure and reporting obligations, tax requirements, carbon pricing, emissions-reductions targets, climate policies, laws and regulations, and financial penalties for non-compliance are also key transition risks for investors.

Liability Risks arise from a failure to mitigate, adapt to, disclose or comply with new climate-related regulations, which expose companies (and individual board members) to fines, sanctions and potential court claims. ClientEarth’s recent announcement of its claim against Shell’s directors for allegedly failing to properly manage the company’s exposure to climate risk in breach of the board’s legal duties under the UK Companies Act is an example of liability risks related to climate change.[1]

How are these risks currently measured by investors?  

Portfolio exposure from physical risk is typically measured through qualitative modelling based on historic data (for example, precipitation levels or security returns) or predictive simulations based on various climate-scenarios. Transition risks are inherently harder to predict but are commonly measured using carbon data and exposure. For example, a big emitting company with large fossil fuel reserves is more vulnerable to transition risks due to potentially higher costs of decarbonization or potential financial penalties from greater emissions or a slower transition to net zero.  

But as climate change accelerates and historic data is increasingly unreliable and uncorrelated with weather events, these metrics are increasingly falling short. More than ever before, investors must manage and protect their portfolios from increasingly unpredictable climate risk and uncertainty. At the same time, forward thinking investors could look to capitalise on the diverse new opportunities presented by the transition to a low-carbon economy, positioning themselves at the forefront of cutting-edge technologies and innovation.

But how? 

These are questions that expert panellists from business, law and academia will be discussing at the upcoming virtual conference ‘Turning aspirations into reality – go green, be ethical and protect your company’, hosted by Clyde & Co in partnership with Queen Mary University of London, on 23 March 2022.

Eminent arbitrators, businesspeople, investors and academics will be discussing key topics related to climate change, finance, investment, policy, regulation and human rights – and how to navigate this landscape for the benefit of your company. 

The event is online, free to attend and available to all. Please sign up at the link below.