Weathering Climate Change: Opportunities and Risks in an Altered Investment Landscape

Climate change is no longer a hypothetical risk. It is already transforming the global economy, reshaping markets and altering the investment landscape.

• In our latest Megatrends paper, Weathering Climate Change, we propose an actionable climate change agenda for institutional investors, encompassing both hidden portfolio vulnerabilities and potential opportunities in the transition to a lower-carbon world.
• We draw on the insights of over 45 PGIM investment professionals across fixed income, equity, real estate and alternatives; 30 leading policymakers, scientists and climate change investors; and a new proprietary survey of 100 global institutional investors.

Our climate destiny is largely predetermined over the next two decades – but this still leaves massive uncertainty for long-term investors looking to navigate climate change.

• The next 20 years of climate change are already locked in, with little variation or uncertainty in the trajectory of climate change under all plausible climate scenarios.
• A highly certain climate destiny translates into massive uncertainty for long-term investors. This is because the most definitive forecast of climate change is for greater variability in weather and more frequent extreme weather events. If there were a VIX for weather, it would already be near all-time highs.

Nevertheless, climate change is spurring a generational reallocation of resources and leading to the emergence of a new set of winners and losers by country and sector.

• The impact on productivity and growth will be highly uneven within and across countries. A well-established body of research demonstrates that climate change lowers economic growth via declines in labor productivity, fluctuations in agricultural yield and the diversion of scarce fiscal resources to fight climate emergencies or build climate resilience. However, these effects vary significantly between, and even within, countries – especially across emerging markets (Exhibit 1).
• There will be a prolonged sunset for fossil fuels. The evolution from fossil fuels to a low-carbon economy will be a defining transition of our generation. However, this will play out over a significantly longer time horizon than many investors might be expecting, and fossil fuels (of course, alongside renewables) will play a prominent role in the energy landscape for decades.

• The indirect knock-on effects from climate change could be as consequential as the direct effects. Escalating risks like “climigration,” civil and political unrest over water and food scarcity, and more widespread zoonotic diseases could ultimately overwhelm the direct effects from climate change.

The real question for investors is not if repricing of climate risks will occur, but when and how. In other words, whether it will be an orderly transition ushered in by government measures and gradual market adjustments or an abrupt, sharp decline in sentiment triggered by a series of local climate “Minsky moments.” The report outlines five catalysts that may drive a more significant repricing of climate change risk across asset classes, sectors, companies and individual securities:

• The growing perception of climate change reaching a tipping point;
• Better disclosures and data to fully analyze physical and transition climate risks;
• An array of policy initiatives looking to fully price climate change externalities;
• The shifting sentiment of investors and consumers;
• The potential for greater corporate climate liability.

Read the full white paper at pgim.com/climate.

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