Why investors should care about climate risk

In a series of blog posts curated by the World Economic Forum’s Climate Change Initiatives, a number of leading voices will present their perspectives on climate change. Contributions are linked to the Forum’s Green Growth Action Alliance project and the Forum’s Global Agenda Council on Climate Change. In the following post, Manuel Lewin, the Head of Responsible Investment at Zurich Insurance Company Ltd, shares his perspective on climate-friendly investment.

When the monsoon rains began to fall in Thailand in October, 2011, few observers could have anticipated that the subsequent flooding would severely disrupt the global supply chain for electronic goods. Within days, businesses around the world that had become accustomed to just-in-time processes were shutting down production lines.

In February 2012, the Japanese electronic goods mega-brand Sony issued a profit warning in which it blamed the flooding for losses of about US$ 1.6 billion.

The disaster illustrated just how closely climate risks have become interconnected with business risks and why, therefore, they must be integrated into business and investment decisions.

Almost every industry is affected. As we have seen, supply chains can be disrupted. Manufacturing sites and whole populations are threatened by rising sea levels. Supplies of raw materials – timber, crops, even water – may be impacted. The energy mix is changing. Legislators and policy-makers around the globe are on the case, adapting building codes, emission standards, etc. And consumption patterns are shifting, too.

As investors, we bear these risks and we ought to make sure that we are properly compensated for them. We ought also to identify those strategies that capitalize on the opportunities presented by environmental challenges.

Investors are slowly moving towards a better understanding of environmental and other non-financial risk factors. Reflecting them in investment decisions will effectively put a price tag on them and is probably the single most powerful incentive for behavioural change in the corporate sector.

However, investors can do more to support green growth. Clean tech private equity is one example, but this is not for all investors. Luckily, there is a growing market for other investment opportunities that directly target a positive impact on the environment, such as World Bank Green Bonds, which fund climate change mitigation and adaptation projects. These are securities that every insurance company or pension plan has the ability to invest in.

Another area is green infrastructure. While new and unfamiliar for many investors, the work of groups such as the Forum’s Green Growth Action Alliance (G2A2) will foster the development of more mainstream instruments for such investments. These are not only economic but also deliver a tangible, potentially even measurable, positive impact on the environment.

I firmly believe that by integrating climate change and other environmental risks into investment decisions we can not only safeguard our portfolios and capitalize on opportunities but also directly target a positive impact on the environment – without sacrificing return.

Author: Manuel Lewin is the Head of Responsible Investment at Zurich Insurance Company Ltd. and co-leads the Institutional Investor Working Group of the Forum’s Green Growth Action Alliance

Image: Submerged vehicles are seen at a car factory in Ayutthaya province REUTERS/Damir Sagolj