Led the debate on the first day of the Sovereign Investment Circle on March 26th 2019 with a keynote presentation highlighting why investors cannot ignore the risk of climate change.

Michael Baldinger, Head of Sustainable and Impact Investing, UBS Asset Management

Key takeaways:

  • Sustainable investing has moved rapidly from a niche subject to a mainstream one;
  • Climate change is impacting economies, changing business models and creating opportunities for investors
  • ESG regulations are spreading and investors need to adapt.
  • Guided by new regulations to fight climate change, capital markets will ultimately decide who gets funded and who does not.

Sustainability – from niche to mainstream

With USD 28.9 trillion of invested assets in 20161, vs. USD 13.2 trillion in 20122, sustainable investing has moved rapidly from a niche approach and into the mainstream.

Baldinger explained that discussions with clients have changed dramatically because of sustainability issues. Transparency is a key issue here because better data and operational oversights have put companies and assets under a bigger spotlight.

Investors now want to use improved transparency to guide their allocations and meet their ESG regulatory obligations. The extent of this is such that 89% of surveyed European institutional investors believe there is a materiality of risk in not incorporating ESG factors3.

Climate change: impacting economies, changing business models and creating opportunities

That's because the world has changed in a very short time. Ten years ago, fears about asset prices, China's economy, and globalization dominated top global risks in terms of impact and likelihood. Now, extreme weather events, natural disasters and failure of climate change mitigation top the list4.

And as Baldinger pointed out, that is because climate risks are turning into a reality, citing the impact of typhoons and extreme weather on GDP numbers in Japan, higher temperatures and rising seas on Singapore, and the more frequent storms on property prices in upstate New York.

But while the impact of climate change is being felt worldwide, Baldinger showed that it is also creating investment opportunities. The Sustainable Development Goals (SDGs) set for 2030, plus increased pressure from investors, are forcing companies to change their business models. And sustainable investing (SI) is developing now to such an extent that it is emerging as a key driver of growth and innovation, creating a set of opportunities worth an estimated USD 12 trillion5.

Adapting to a changing world

Going further, Baldinger showed that investors need to adapt as governments enact ESG regulations. Whether investors believe in climate change, or not, they will have to adapt to new ESG regulations that target pension funds, stewardship codes, ESG integration and corporate disclosure guidelines. In the end, he stressed, 'capital markets will punish you if you don't adapt' to these new realities.

Baldinger showed that, encouragingly, we are seeing a noticeable change in mindset. Recent news that sovereign wealth funds in Norway, France, and New Zealand are moving away from fossil fuel investments demonstrates that ESG issues are starting to drive real change in how some of the biggest investors allocate their money. Crucially, as Baldinger pointed out, the Norway case stems from a judgement about the long-term asset price risks associated with oil and gas investments as the world moves to more sustainable and renewable energy sources.

Finding solutions

But as Baldinger emphasized, it is also vital for investors to find solutions. Adapting to stricter rules and tapping into larger datasets, investors can find customized solutions through which to invest according to sustainability principles.

Additionally, there are a growing range of strategies available which not only use data and regulations as a guide, but which also engage directly with companies to drive operational changes that are climate-aware and which support long-term growth.

Summing up, Baldinger stressed that investors can no longer ignore climate change because its impact is clearly being felt worldwide, is driving new waves of regulation and is forcing companies to adapt and develop more sustainable and innovative growth strategies.

With these realities in mind, it is imperative for investors to consider climate-aware strategies in their allocations to both propel change in the world around us and also to support their long-term investment objectives.

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