I. Ostrum AM's experts have studied the impact of climate change across economic sectors and its contribution to the risk of capital loss for investors.
Ostrum AM’s findings point to physical risks as the most immediate and visible risks. They refer to all immediate impacts related to climate change, and the increase in the frequency and magnitude of climatic hazards (droughts, fires, floods, heavy heat, hurricanes, etc.). By definition, all companies operating in industrial sectors [with large investment in tangible assets] are exposed to physical risks. We take examples of some economic sectors (utilities, insurance etc …) to illustrate this type of risks.
Another type of risks, Transition risks, is fast evolving and may become more critical than physical risks for certain sectors. Transition risks result from anticipating climate change, implementing a low carbon economic model, and adapting to changing policies and regulations that burden companies. They are inextricably linked to the concept of ‘stranded asset.’ Key economic sectors, responsible for a significant part of emissions (fossil fuels, automobiles, etc.), have seen an increasing regulatory intervention. It translates to taxation pressure, and financial or production constraints (carbon market, emission limitations).
Anticipating Climate risks allows to assess firms that will -inside these threatened industries- be able to adapt. Ostrum AM sectorial organization is key to deploy the best sectorial allocation and the best selection for our portfolios.
II. To prevent or adapt to the effects of climate change, companies must combine complementary strategies that are costly (R & D, property investments), and sometimes disruptive (changes in organizations and/or business models).
Mitigation strategies, mainly focused on reducing carbon emissions, are the most visible today. They are largely initiated or amplified by regulations such as the EU Green Deal and Fit for 55 plans, with major implications for transport, aviation, energy and construction.
Adaptation strategies cover initiatives to mitigate and take advantage of the impacts of climate change. They lead to a thorough review of organizations, locations of activities, and technologies used. We illustrate all these aspects by taking some economic sectors as examples.
How companies deploy new strategies brings new concerns as there is a potential for mismanagement:
- Adaptation strategies are relatively neglected (vs mitigations strategies) in climate change management strategies, because their effects are less visible in the short term, and less easily measurable;
- The adoption of carbon neutrality must be handled with great caution, in the perspective of global carbon neutrality, rather than per company;
- Climate change management strategies have to be more inclusive, and consider the question of "Just transition", as well as the issue of biodiversity, which is inextricably linked.
For Ostrum AM, companies must take on more sophistication in relation to their climate approach, to succeed in an environment where regulations are becoming more and more demanding.