The 2019–2020 wildfires of Australia were the largest in its history, stretching nearly six months and burning almost 19 million hectares by March 2020.* California’s all-time record was set in 2018, although this season’s wildfires have been triggered by an unprecedented number of lightning strikes, and could potentially set another record for acres burned by the end of the season.
Wildfires are caused by a combination of climacteric events including heat waves and lightning strikes. As the weather feels more volatile, climate scientists have drawn systematic connections between climate change and extreme weather events—such as droughts, heat waves, or hurricanes—which exact devastating human and economic tolls.**
Such extreme events impose risks across all asset classes, impacting real estate valuation, increasing insurance premiums, lowering crop yields, disrupting supply chains, and lowering tax revenue for local and national governments. Response to climate change would have an impact, too. Regulatory risks and incentives, as well as technological innovation, create a new set of risks and opportunities that companies need to manage and investors should pay attention to.
Takeaways for investors:
- Climate change is a material issue for companies and governments and could have a ripple effect in portfolios. Investors should consider the wide range of possible manifestations of climate change risk in their portfolios knowing that there are no simple solutions.
- Considering ESG Leader equity and bond strategies, which select companies that are best-in-class in managing climate change risks, as well as other social or governance risks, may reduce overall portfolio risk. Buying green bonds, issued mostly by companies or multilateral development banks to fund green projects, may help companies and governments prepare for the climate transition while showing defensive characteristics in portfolios.
- We also see potential upside for investors interested in funding solutions to the different problems linked to climate change. As governments across the world are doubling down on "green deal"-type incentives, companies innovating in environmental themes such as "Clean air and carbon reduction," "Energy efficiency," and "Water scarcity" could benefit.
Read more in Sustainable Investing Perspectives 26 Aug 2020.
Main contributors: Amantia Muhedini and Michelle Laliberte
This content is a product of the Chief Investment Office.
* Alexander Filkov, Tuan Ngo, Stuart Matthews, Simeon Telfer, Trent D. Penman, "Impact of Australia’s catastrophic 2019/20 bushfire season on communities and environment. Retrospective analysis and current trends," Journal of Safety Science and Resilience, 2020.
** National Oceanic and Atmospheric Administration, "Report: Climate change is making specific weather events more extreme," 9 December 2019