Climate change the next major investment theme

Schroders notes asset allocations with portfolio exposed in mitigating climate change is expected to emerge as the next game changer


FINDING the right investment theme is a major challenge for even the most seasoned investor. Famous investors like Warren Buffett have built their wealth by making the right investments over the long-term period.

While technology has been one of the major investment thematics in the past decade, smart money is now betting climate change presents a good long-term investment opportunity as the problem is still massively underestimated despite scientific data supporting the risk is real. Its implication on the world is becoming too apparent to dismiss it as a hoax.

In order to stabilise global temperatures within the +2ºC limit defined as “safe” by the Intergovernmental Panel on Climate Change (IPCC), spending on greenhouse gas mitigation will have to rise to at least US$2 trillion (RM8.16 trillion) a year over the next 10 years. That cost will have to be borne by governments, consumers and companies, according to a recent Schroders plc’s global equities outlook report.

Environmental changes are taking place more rapidly than ever, and thus demand investment strategies and decision to incorporate climate risks and the attention they deserve.

As we move into the new year, Schroders noted stock selection will become more important in 2020 as global uncertainty continues and the US bull market is showing signs of exhaustion.

“Given the levels of uncertainty affecting the global economy, the range of potential macroeconomic outcomes is quite wide. Following a 10-year period in which the S&P 500 has delivered a 250% total return (in US dollar) and global equities have more than doubled, it seems reasonable to assume more modest returns from equities going forward,” said global investment company Schroders.

Next Game Changer
Against that backdrop, Schroders noted asset allocations with portfolio exposed in mitigating climate change is expected to emerge as the next game changer in the reallocation of global fund.

According to Swiss Re Group, an insurance risk management company, direct economic losses related to global catastrophe and man-made disaster amounted to US$40 billion in the first half of 2019 alone.

As such, market awareness is heightened with investors favouring sustainable activities for the return outlook.

“There will be a significant number of beneficiaries from the switch to more sustainable activity. The process of energy transition is already well underway, despite rather lukewarm support from many governments, including the US. Happily, economic reasons continue to prevail, and the overwhelming cost advantage of wind and solar versus traditional generation sources is translating into a massive uplift for many renewable energy (RE) companies,” said Schroders.

While it is impossible to decarbonise completely, governments, regulators and companies around the world have started taking steps to address the urgency in making headways in sustainability themed investments.

The Malaysian government, for example, intends to raise its power generation capacity mix from renewable sources to 20% by 2025 from about 2% early last year.

Bank Negara Malaysia intends to engage financial institutions to better understand how they consider climate risks in their risk management approaches and practices.

International financial institutions like the International Finance Corp (IFC), which is a member of the World Bank Group, is providing a financing package of US$212.5 million to Vietnam Prosperity Joint Stock Commercial Bank to help expand its lending to small and medium enterprises and boost financing especially for climate-friendly projects.

Vietnam’s is one of the most carbon-intensive countries in the world, ranking only after China and Mongolia in the East Asian and Pacific region.

While reducing greenhouse-gas emissions has been a national target to mitigate climate change impact, it presents a US$753 billion climate investment opportunity for Vietnam between 2016 and 2030, according to an IFC study.

BlackRock Inc, the world’s largest asset management firm, announced as a substantial shareholder in Hilton, Park Hotels & Resorts and Red Lion Hotels, would place sustainability factor at the core of its investment approach and would exit any investment that deemed deterrent to the climate.

Its CEO Larry Fink in an annual letter addressed to clients recently stated: “Awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance. The evidence on climate risk is compelling investors to reassess core assumptions about modern finance”.

Investment Opportunities
Where do climate-related investment opportunities lie?

Schroders noted some of the low-lying fruits are sectors like the automotive where sales of electric vehicles (EVs) are set to increase in the next few years driven, by a more favourable regulatory framework in many countries.

The international fund manager said demand for climate-friendly products will partly be determined by the attractiveness of the products themselves.

As these improve, consumers will migrate to EVs in the same way they adopted email, mobile phones, online shopping and entertainment streaming services.

In Malaysia, the immediate climate-friendly opportunities could be in the form of the handful of small-listed RE-based companies to consider or indirectly via the environmental, social and governance-based funds offered by various financial institutions. And as this thematic gains popularity, more opportunities may come to the market for excited investors over a good cause.