Global Sustainability: Climate change investing

With the rise of climate investing, we have seen the emergence of investment strategies based largely on objective, emissions-related metrics such as carbon intensity or alternative carbon metrics (e.g. emissions to earnings). A singular focus on emissions, however, leaves out other significant climate change "impact mechanisms" (e.g. policy, technology, and physical events) that could influence performance. Linked to our ESG Risk Radar series (where we identify financially material ESG factors), we offer a framework that attempts to holistically integrate these climate impact mechanisms across different sectors/industries, based on the forward-looking views of our sector analysts. We illustrate how sectors are exposed to risks from different climate impact mechanisms in varying degrees—for instance, Australia Insurance could be more impacted by physical events than China renewables, whereas the latter could be more exposed to policy/technology developments. An integration of these sector-specific and forward-looking assessments enables the development of differentiating climate strategies that stretch beyond a singular reliance on emissions data.

We further delve into one of the six impact mechanisms—physical events/changes—by analysing the status quo in APAC and explaining the viable approaches to projections. Echoing the alarms sounded by IPCC's latest report, data from the EM-DAT Disaster Database reveal a rising materiality of physical risks in APAC: physical damages from 2010 to 2020 (averaged US$51.7bn pa) were 298% higher than in the preceding decade (00-09: US$17.3bn), with increases observed in all APAC sub-regions. Floods/storms stand out as APAC's most damaging physical events.

To understand approaches to project physical events/changes, we draw on our expert calls to we highlight the specific purposes and contexts under which climate models are potentially useful for financial analysis.