The asset management industry has a key role to play in the face of the climate emergency facing humanity. We spoke to Emma Haziza, hydrologist, PhD Mines ParisTech, Founder and President of Mayane, and Rick Stathers, Climate Specialist at Aviva Investors to find out how asset managers can support companies in their climate transition efforts.
4 minute read
Why is it urgent to act on climate risks?
Rick Stathers: The Paris Agreement of 2015 sought to cap the average rise in temperatures to 1.5°C above pre-industrial levels by 2100. Four years on, we have to recognise we have little room for manoeuvre left. The CO2 emissions budget left if we are to hit this target is 420 gigatonnes. However, at the current rate of emissions this budget will be used up in ten years. This means that to have any hope of hitting this target emissions must be halved every decade which means cutting them by seven per cent annually. Given the mitigation policies put in place so far and the limited potential of CO2 capture technology, this is a big ask.
Emma Haziza: The consequences of the various scientific projections on our environment and our ways of life are difficult to predict as we live in a complex, globalised world with multiple repercussions. But whatever the scenario, it is important to understand that an average rise in temperatures by 2100 is not limited to the notion of climate "warming" alone. The accumulation of greenhouse gas (GHG) emissions since the last century, with a concentration of CO2 in the Earth's atmosphere of more than 400 parts per million, the highest level in 3 to 5 million years, is causing a climate "change" that goes well beyond "warming". However, this terminology is still used incorrectly, which likely feeds climate scepticism.
What does climate change look like?
Emma Haziza: Understanding climate change is recognising that we now live in an unstable world, with more marked and difficult-to-forecast weather phenomena. Air masses will become warmer in places, but also colder in others. Rainfall will be more infrequent but also more extreme with greater risk of flooding as a result. Droughts will be more frequent, with colossal implications on agriculture as well as on drinking-water supply. This summer, some French towns had to be supplied by tank trucks, which would have been inconceivable just two or three years ago. People living in Northern Europe are experiencing heatwaves more often, sometimes as early as in late spring. Faced with highly urbanised areas, which have been transformed by human activity, it is imperative to ask ourselves whether our homes and our economic structure are adapted to this climate change.
Are there any consequences for companies already?
Rick Stathers: Absolutely. There are plenty of examples. In Germany, for instance, traffic on the Rhine was halted in summer 2017 because of low river levels. It is a crucial route for finished goods and raw materials supplying industry in the Rhine basin. This summer, in France, nuclear power plants were halted for several days as they could not pump in enough water to cool the reactors. This could have affected the power grids. No sector will escape the effects of climate change. Companies have no choice but to adapt.
The idea of "adaptation" keeps appearing. Is mitigation not enough?
Emma Haziza: If we stopped emitting greenhouse gases today, the results would only be noticeable in 30 years. So we have no choice but to adapt to the climate change caused by past emissions. This raises the question of how resilient we are to more extreme and more frequent weather phenomena – that is, our ability to bounce back and mitigate their adverse effects. Beyond scenario planning to 2100, it is imperative to develop adaptation solutions to manage the inevitable phenomenon that climate change has become. Yet, for the time being, adaptation solutions are the poor relation of the policies put in place to act on climate risks. The majority of these are still focused on GHG emission mitigation.
Rick Stathers: Investment in adaptation solutions is still far too low. According to the Global Commission on Adaptation1, it is 20 times lower than investment to limit GHG emissions. Also, natural disasters driven by climate factors are causing thousands of deaths and gigantic costs each year. In 2017 alone, the costs were estimated at US$320 billion2. Whether we are talking about mitigation or adaptation solutions, all the research shows that the cost-benefit ratio of early action is high. According to the Global Commission on Adaptation, investing US$1,800 billion in adaptation between 2020 and 2030, targeting five areas – advance warning systems, adaptation of infrastructure, farming improvements, protection of mangrove swamps, protection of water resources – could generate net profits of US$7,100 billion.
Should adaptation solutions be developed through international coordination?
Emma Haziza: To use a phrase coined in the 1987 Brundtland Report3, in which the term "sustainable development" was first used, "the Earth is one but the world is not". To be effective, adaptation solutions must be targeted and local, as the manifestations of climate change impact societies and regions in totally different ways around the world. In addition, climate risk is an expression of a region's vulnerability. Climate-risk management therefore requires in-depth geological knowledge of the region, an appreciation of economic and social issues, and an ability to learn from the past. The resilient regions of the future will remain exposed to extreme climatic phenomena, but will be adapted, with reliable warning systems enabling populations to anticipate and mitigate damage. In the south of France, cities such as Nîmes that face flooding risks are developing solutions to warn inhabitants and are adapting their environment by learning from past disasters.
Could adaptation to climate change also create new markets?
Emma Haziza: Adapting effectively requires the development of new technological processes, and the creation of new goods and services. There are already many opportunities for growth, for example among construction companies, in those developing solutions that improve energy efficiency in housing and transport, companies that optimise drinking-water management and irrigation systems, and even companies involved in coastal planning to cope with rising water levels. The adaptation of private stakeholders, both at company and household level, with a change in behaviour towards healthier and less carbon-intensive lifestyles and consumption, will be crucial to improving our societies' resilience to climate change.
So what is the role of a climate specialist and their team for an asset manager like Aviva who wants to accelerate the redistribution of capital towards sustainable companies?
Rick Stathers: Our role is multi-faceted. First of all, we track scientific research on what is happening to the climate and translate it into usable data for our portfolio management teams. We also support teams in analysing companies, specifically gauging their exposure to climate risks, the resulting costs and the resources they are devoting to adaptation.
The aim is to allow portfolio management teams to identify those companies delivering solutions to address the climate emergency, but also to steer investment toward companies that, while exposed to climate risks, have chosen to tweak their economic model to ensure their survival in the new environment. If necessary, we engage with companies to help them improve their climate risk management policies. We also work with the industry and other participants to continue integrating the climate challenge into wider investment practice and financial services. Finally, we keep all our clients and other stakeholders informed about what Aviva Investors and the broader Aviva group are doing to combat the climate emergency and the results of its efforts to cut the climate impacts of its investments.