Investing sustainably

Why investors should heed this summer’s climate warnings

15 September 2023

Damian Payiatakis, London UK, Head of Sustainable & Impact Investing

Please note: This article is designed to be thought leadership content, to offer big picture views and analysis of interesting issues and trends that matter to our clients and the world in which we live. It is not designed to be taken as expert advice, investment advice or a recommendation, and any reference to specific companies is therefore not an opinion as to their present or future value or broader ESG credentials. Reliance upon any of the information in this article is at the sole discretion of the reader. Some of the views and issues discussed in this article may derive from third-party research or data which is relied upon by Barclays Private Bank and may not have been validated. Such research and data are made available as additional information for the reader where appropriate.

Key points

  • As heatwaves, wildfires and other extreme weather events increasingly ravage the planet, what can investors do to be on the right side of climate change? 
  • Unfortunately, the frequency and severity of extreme weather is likely to worsen. Investors use climate-related economic models to extrapolate the potential impact of warmer temperatures on economies, industries and share prices. But, if the models fail to capture the speed and intensity of climate change, the risks may be underpriced in financial markets 
  • Given the uncertainties and long-term nature frequently associated with global warming, there is a tendency for investors to do nothing about it. However, the risk of inaction could be costly and risk wealth destruction 
  • Behaving cautiously now, to understand and mitigate risks, could enable portfolios to be positioned for unknown and potentially undiversifiable climate risks 

As a series of dramatic climate records and events are set around the world this summer, with the end of holiday season, investors might ponder if they understand and are prepared for climate-change risks in their portfolios. 

This article reflects on recent conditions and assesses climate risks and what investors can do to benefit the planet and their portfolio. 

Earth’s weather signals flash red

Climate change has been studied and researched over the last two centuries (see box below). This summer, however, the most recent effects have not felt academic or abstract, but real.  

Increasingly, its physical impacts are being seen first-hand as familiar, if disturbing, patterns of wildfires, heatwaves, extreme storms, flooding, melting polar regions or coral bleaching hit home. Indeed, these effects appear more widespread, rapid, and intense than the past. 

Globally, temperatures have soared this century (see chart) and this was the hottest June on record1. Similarly, July was the warmest month seen so far2. In the Northern Hemisphere, extreme heatwaves scorched parts of the US, southern Europe and China. In August, in the Southern Cone of South America, winter temperatures that are typically 5-20°C, depending on location, instead were in the high 30s3

Warmest June on record globally

After over 40 years of global temperatures being above their average for the 20th century, June 2023 is the hottest on record

After over 40 years of global temperatures being above their average for the 20th century, June 2023 is the hottest on record

Source: National Oceanic and Atmospheric Association, Barclays Private Bank, August 2023

Widespread worrying weather phenomena

In contrast to the many parched regions seen in recent months, precipitation has deluged others. Globally, June was the second wettest ever seen4. In some cases, pronounced swings occurred in the same region. For example, in June, the UK rainfall was 68% of the long-term average. However, in July, it was 170% of the average, in the wettest July since 20095

Oceans warmed and were the hottest on record in May, June and July6. Holidaymakers off the coast of Ireland, the UK and in the Baltic Sea felt waters warmed by “extreme” marine heatwaves in the North Atlantic7. Coral reefs off the Florida Keys have been completely bleached, or died, in a couple of weeks of raised water temperatures8.

Antarctic sea ice has shrunk to record lows. An area ten times the size of the UK is missing, compared to the 1981-2010 averages9. This adds another year, to a six-year trend of rapidly declining in sea, and now land, ice in the region10.  

Summer wildfires have raged across the Mediterranean, Hawaii and in Canada. The latter recording the largest burned area seen in the country’s history11, while Maui’s wildfire is the deadliest seen in the US since 191812, at the time of writing. Holiday tourists fled and smoke filled the skies thousands of kilometres away, impacting air quality. 

Key dates in the study of climate change

During the nineteenth century, concepts around climate change, such as the greenhouse effect, were being developed and demonstrated.

Svante Arrhenius, a Swedish physicist, first assembled them into a theory in 1896 that human-caused CO2 emissions from burning fossil fuels would raise the global temperatureA.

In 1938, an amateur scientist, Guy Callender first calculated that global temperatures had risen over the past fifty yearsB.

In 1958, Dr Charles David Keeling provided first evidence that CO2 levels were rising with a link to fossil fuelsC.

The field of climate science has since advanced, but barely registering on the public’s mindset. It was only in 1988 that testimony of James Hansen, NASA’s Director Goddard Institute for Space Studies before the US Congress, that brought the topic to the public’s attentionD.

In the same year, the Intergovernmental Panel on Climate Change (IPCC) was formed to provide policymakers with regular and comprehensive views from the scientific community on the current state of knowledge on climate changeE.

Then, in 1994, the first climate change legislation came into force as 197 countries signed up to the United Nations Framework Convention on Climate Change (UNFCCC) to limit greenhouse gases and prevent climate changeF.

A On the influence of carbonic acid in the air upon temperature of the ground, Svante Arrhenius, April 1896

B A brief history of climate change discoveries, UK Research and Innovation, August 2023

C The Keeling curve: Carbon dioxide measurements at Mauna Loa, ACS Chemistry of Life, 30 April 2015

D Global warming has begun, expert tells Senate, The New York Times, 24 June 1988

E History of the IPCC, IPCC, August 2023

F What is the United Nations Framework Convention on climate change?, United Nations Climate Change, August 2023

Climate change: entering a new phase? 

While the above examples of the effects of climate change are disturbing, it’s still an incomplete catalogue of events around the world this summer; or even since the start of 2023.  

More unnerving is that the latest records follow last year’s global average temperature being only 1.16°C degrees above the pre-industrial baseline13. In other words, the latest string of weather-related records, and costs, has occurred well shy of the 1.5°C global-warming target, or well below the 2.0°C objective of the Paris Agreement, let alone the 2.7°C of warming that current policies and action implies14

While largely expected at some point, many climate scientists have been surprised by their magnitude15. Or, as United Nations Secretary General has summarised, these indicators show that Earth has passed from a warming phase into an “era of global boiling”16

Given the continued rate of new emissions added to the stock already in the atmosphere, researchers have calculated that now there’s a 66% chance we will exceed the 1.5°C warming threshold between now and 202717.

The longer the Earth’s average temperature is above this threshold, the physical impacts are expected to be more frequent, intense, and severe.  

Speed of climate impact takes experts by surprise 

The difference between what current trends in climate change, and those that were expected, suggests the speed of warming has been underestimated.  

As one scientist studying melting sea-ice articulated: "I think this has taken us by surprise in terms of the speed of which has happened. It's definitely not the best-case scenario that we were looking at – it's closer to the worst case.”18

What does this mean for investors? 

For investors, this provokes a question. If climate impact scenarios are optimistic, what does this mean for climate-based financial models? And what about the ramifications on economic and financial expectations? 

Many climate economic models focus on the effects of climate change as predicted at the end of this century or beyond19. Like most financial modelling, historical data and consensus forecasts are used for the rates of change, to extrapolate future scenarios.  

When extended across decades, it means that climate impact may appear marginal on economies and financial assets. Often this results in a few basis points of lost economic growth, as measured by gross domestic product20.

But what if these models haven’t fully integrated climate science? And moreover, what if climate change is more pronounced, or is happening faster, than even current climate science has predicted?

Dangers of modelling errors 

The result would be a significant under-pricing of the systemic risks that investors now face. This is the conclusion of a report from think tank Carbon Tracker, published in July, that “economic research…ignores critical scientific evidence about the financial risks within a rapidly changing climate.”21 This is primarily due to climate change economics papers being refereed by economists who may not have necessary domain knowledge to confirm the scientific basis for associated modelling. 

Unfortunately, this would not be the first time that mainstream economic models have been inaccurate. For instance, in the lead up the global financial crisis in 2008, the dominant thinking did not include elements22 and warnings from alternative models that ultimately proved very costly23.  

Overcoming a bias towards inaction

Investors should be concerned about portfolio exposure to the inherent and uncertain risks of climate change. Like all risks, they face a choice – continue to maintain current positioning or to take action either to mitigate the risks or address their root causes.  

From a behavioural finance perspective, investors may fall victim to a status quo bias – to continue with their existing investment approach rather than make a change, especially given the complexity of climate change. 

As most narratives around climate change focus on future years, or even decades, it can appear sensible to wait to act. However, with the physical impacts of global warming occurring earlier than many expected and questions raised about climate financial models, this may not be a prudent course.  

Given wealth preservation is a fundamental priority of most investors, taking action now to, at a minimum, understand these risks would be a sensible course.

Small changes lead to big results 

Humanity took nearly one hundred years to get from Arrhenius’ initial theory on the influence of carbon-dioxide emissions on the climate, to the first global agreement for collective action via the United Nations Framework Convention on Climate Change (UNFCCC). Nearly thirty years have elapsed since that point. With environmental records and warnings from nature emerging at pace all around us, it may be easy to become disillusioned. 

Rather than discourage action, as climate ’doomers’ would advocate24, these should be seen as valuable warnings. They illustrate the potential for a different outcome – if we make changes to the system and our contribution.  

Like the effects of compounding, even small actions when scaled can lead to big change. Once the summer holiday is over, investors should consider how best to use the new season to begin tackling climate-change risks in their portfolio. 

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