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Investors failing to see incremental climate change costs because of ‘extreme’ event focus

Findings based on four new sector reports on climate change implications.

Companies and their investors are missing the potential impact of climate change on share prices by focusing on the risks of extreme weather events rather than examining more relevant incremental costs and opportunities, according to research by four of the UK’s largest institutional investors. The report, titled: “Managing the unavoidable: investment implications of a changing climate”, was produced by an investor ginger group managing over £200bn in assets that was created last year. It comprises the Universities Superannuation Scheme, Railpen, the pension scheme for the UK railways industry, and two UK fund managers: Henderson Global Investors and Insight Investment. The report, which was written with input from Acclimatise, a specialist consultant, draws its broader conclusions from four sector specific reports published at the same time looking at energy utilities, oil & gas, real estate and water companies. In a series of ‘key findings’ designed to generate debate among investors, the report says investors and corporates are paying too much attention to the dangers of blow-out risks such as flooding ad increased ferocity of storms, but much less to gradual changing weather patterns like the effects of incremental rise in ambient temperatures on building performance and energy efficiency. The latter, the report says, are more likely to impact share prices by increasing operational costs beyond forecasts, contributing to falling revenues, and requiring unplanned capital and additional financing to manage the consequences.Seb Beloe, head of SRI research at Henderson Global Investors, said: “These incremental changes are already starting to affect operational costs and, in some cases, asset values. The research underpinning this report suggests that we as investors need to pay much greater attention to how climate change/weather affects our investment decisions. This will require paying attention to how climate change adaptation will affect company-specific business models, value drivers, strategy, governance, cash flows and assets”.
The report has been backed by the UK government. Hilary Benn, Secretary of State for Environment, Food and Rural Affairs, said: “In outlining the risks that inevitable climate change poses for companies, this report encourages investors to examine adaptation-related risks in their portfolios and use their influence to encourage companies to manage these risks more effectively.”
David Russell, co-head of responsible investment at USS, said the report also pointed out that climate change may also present competitive opportunities for many companies, but that to date many saw the issue too much in terms of risk. The report also urges investors to play a more proactive role in public policy debates for the long-term on adaptation to the effects of climate change.
Link to reports