The climate change investment opportunity most people are overlooking

Climate change investing tends to focus on removing carbon from portfolios or helping companies decarbonise. But a third opportunity — investing in adaptation — is often overlooked. Regnan’s Alison George explains

• Climate-aware portfolios focused on divestment, decarbonisation
• Adaptation is a third opportunity often overlooked
• Irreversible climate change means adaptation is essential

CLIMATE CHANGE caused by past emissions is likely to be irreversible for thousands of years — even if emissions stopped today.

That was a finding in the latest major report from the United Nations Intergovernmental Panel on Climate Change released in August.

Despite this, climate-aware portfolio construction often focuses on decarbonisation by removing investments with high emissions; tilting to low-carbon stocks and investing in offsets; or by investing in solutions that help companies reduce emissions — such as green hydrogen or low-carbon transportation.

But there is another approach that is largely overlooked — investing in companies that are successfully adapting to climate change.

“Adaptation is always the poor cousin to decarbonisation,” says Alison George, head of research at global responsible investing leader Regnan.

Find out about

Regnan Global Equity Impact Solutions Fund

Read more

“But it’s a critical component of climate-aware investing given the amount of climate change already baked into the system from historical emissions.

Huge driver of investment

“Adaptation will be a huge driver of investment going forward, alongside transition.

“Climate-resilient infrastructure and water-efficiency solutions that respond to reduced water availability under climate change are two key opportunity areas.”

Adaptation has been discounted as a legitimate investment option due to two investment views that have dominated in recent years, says George.

The first factor is the group of people who did not believe in climate change in the first place. “For anyone who doesn’t think climate change is real, why would you spend money on adapting?”

The second, more important factor is a belief that focusing on adaptation is like giving up the fight against climate change.  

In truth, transition and adaptation are both needed — and both offer investible solutions.

Find out about

Pendal Horizon Sustainable Australian Share Fund

Read more

Pendal Group’s responsible investing specialists note in a recent two-part climate-change investing report that the physical impacts of climate change will continue to materialise even in the best-case, low-carbon transition scenario.

The report discusses how permanent changes in rainfall patterns and increased temperatures have significant impacts on agricultural productivity. This means businesses that do not adapt — for example through geographic or product diversification — may see a permanent decline in profits.

“A changing climate also impacts consumer demand,” the report points outs.

“Businesses that don’t pay attention to emerging trends from changing seasons and weather patterns may risk being caught out.

“For example, shorter winters can leave retail businesses with surplus winter stock, while wetter summers may reduce demand for outdoor entertainment.”

The report provides the example of a salmon farming business investing in cooler water offshore pens and ways to lift water oxygen levels.

Download: Pendal’s two-part guide explaining the impact of climate change on business and investing.

About Alison George

Alison George is Regnan’s head of research. She has deep experience in ESG, responsible investment and active ownership. Alison oversees Regnan’s research frameworks, processes and outputs, ensuring it remains at the forefront of industry practice and meets evolving clients needs.