How to Incorporate Climate Impact in Investment Decision-Making

By: Rick Davis
May 14, 2021
May 14, 2021

Few Sustainable Development Goals (SDGs) are more pressing than those focused on access to clean resources and combating global climate change. The United Nations Sustainable Development Goal 13: Climate Action, for instance, is about taking action now to limit the drastic, irreversible environmental and economic consequences that threaten every country around the world, not to mention investment portfolios of all shapes and sizes.

Typically when investors and financial advisors include climate change and its impacts in their considerations, it is often limited to the potential challenges posed by environmental regulations or activism to companies or projects. However, there are immense opportunities available to investors that recognize the power of the global sustainability zeitgeist to bolster returns and engage a broader audience in their venture’s success.

Climate Change as an Analytical Filter

It is not hyperbolic to say that investment risks from climate change are everywhere and are found in every sector. Any significant investment decision should, at a minimum, incorporate potential climate impacts to prevent unexpected losses from environmental effects like rising sea levels or altered seasonality, among others. Neglecting this analysis could result in stranded assets, which may abruptly lose their value due to changes in the local climate.

For example, consider Carbon Tracker’s Unburnable Carbon Report, which identified a colossal amount of fossil fuel supplies that are “unburnable” in a below 2°C scenario. When this report was released in 2011 there was only 565 GtCO2 (gigatonnes of equivalent carbon dioxide) allowed for a 2°C carbon budget, but 2,795 GtCO2 available in public and private reserves. Fossil fuel investments may seem at obvious risk from climate change, but similar asset stranding can occur in almost any sector.

A climate lens for investing is not just about spotting and avoiding risk. It can lead to the identification of new strategic sustainability opportunities (e.g., untapped incentives, new potential co-investors, or unexplored sectors such as renewable energy or resilient agriculture). With our considerable environmental investment expertise, the LOHAS team supports investors and their advisors as they analyze both risks and rewards associated with climate change.

Key Sectors

While sustainability considerations are relevant in multiple sectors from industrial manufacturing to business-to-consumer companies, here are a couple of areas of particular interest:

Real Estate

Few sectors are more impacted by climate change and the heightened focus on the environment than real estate. A shifting climate poses physical risks, such as infrastructure damage or higher operating costs, and transitional risks like the reduced marketability of a location after severe climate events. While investors are accustomed to using insurance to protect against extreme climate events, this short-term protection is ineffective against slow reductions in property value as assets lose liquidity.

Again, there are more than just risks when considering the climate and real estate. There is a myriad of cost-saving solutions, incentives, and brand benefits that can be captured through insightful sustainability strategies. With skill-sets that span tactical technologies to marketing innovations to governmental programs, the LOHAS team is well suited to help real estate investors and their advisors take full advantage of the available opportunities.

Film and Television

The exploding interest in climate and sustainability issues (especially among young people) has not escaped the notice of Hollywood. The “conscious viewer,” a relative of the “conscious consumer,” wants to watch stories that reflect their social and environmental values and that are working towards positive change. These stories are often labeled Social Impact Entertainment, and they present an opportunity to build enduring, authentic relationships with audiences and generate effective returns, all while promoting meaningful environmental or social change.

For investors inexperienced in the industry, seeing particular environmental concerns (or success stories) converted into financially successful film or television productions requires the support of parties skilled in navigating the realm of impact entertainment. The LOHAS team has broad industry knowledge gleaned from many years providing financial and strategic advisory and other services to a wide variety of entertainment companies and productions and can help transfer investors’ visions to the screen.

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