What the Paris Climate Deal Means for Investors

Will the COP 21 Paris Agreement Change Investing?

Although mainstream US media sites didn't pay that much attention at the end of 2015, global climate negotiations were completed, with the final Paris Agreement now in hand, and nothing will ever be the same.

The scientific implications have long been accepted by all of the world's nations, as discussed at length and ratified through the work of the IPCC.

Without correction, climate change is fully expected to result, over the next generation alone, therefore during most of our lifetimes, in the following catastrophic impacts:

  •    Insufficient Agricultural Yields
  •    Billions of People experiencing Water Stress
  •    More Weather-Related Disaster and Sea Level Rise
  •    Mass Extinctions and Severe Loss of Biodiversity
  •    Spread of Disease
  •    Millions if not Billions of Climate Refugees
  •    Resource Constraints across mineral and fertilizer categories, jeopardizing food production
  •    The Health of Forests, Fish & Oceans at Increasing Risk

The financial implications of this are very significant and many investors may well miss out if they aren't careful.

Basically, either business-as-usual will lead to the disasters above or dramatic changes in business practice will be accelerated to keep the world away from such destruction.

Either way, it is time for all US investors to pay more attention to this for the sake of their own net worth going forward.

As we wrote in recent pieces, there are 5 clear ways value has already been created and destroyed, and this will now only accelerate, including but not limited to:

  1. The Ongoing Energy Transition - over the past few years alone, coal companies have all failed in the US, and are failing now globally. The price of oil has collapsed. Solar is getting cheaper and the imperative for it is growing and has now been globally agreed to in Paris. Why would you want your investments to be on the wrong side of history?  Well, apparently BlackRock, Fidelity and Vanguard are or have been - they have some work to do, and so do you apparently to check in on your investments.
  1. AFOLU - or Agriculture, Forests and Land Use - this sector makes up roughly 25% of the global footprint, and expect forest preservation to become a growing focus for absorbing carbon and otherwise providing needed balance.  Land Use patterns also need work as does agricultural practice in general.  Palm Oil practices and the fires burning out of control in Indonesia will be of increasing focus, as will endangered species through other trade agreements.
  2. Transportation - electric car technology, batteries and storage, efficient aviation strategies, nothing will be the same 20 years from now.  Trucks will be self driving, Apple and Google are trying to play in this space, are you best sitting on your investment hands will all this going on?  You better make sure your fund managers know what's up, it wasn't long ago that they weren't paying much attention, even if they say they look at governance, less than 10% of financial professionals said they make decisions on the basis of the environment. Not nearly enough for your sake as an investor to be sure - have you asked your fund manager what they are doing and is it just lip service?
  3. Real Estate and Infrastructure - much of the new investment activity going forward is expected to be in trillions of dollars of new infrastructure and fixed income including the increasing private debt space.  Real Estate is also on the rise (no pun intended).  Pressure will increase to make these new investments green, new standards and commitments will emerge.  Being on the wrong side of this will mean lost investment dollars.  Understanding which companies will benefit is another way to play this, through what we call Positive Sustainable Investing, which has already been financially outperforming.  
  1. The Rest of Industrial Processes - dMass has been leading the way on identifying the innovations that will continue to transform business. Biomimicry, Dematerialization and other forms of innovation will continue to spark value creation, especially on the back of the Value Driver Model work we found created billions of dollars of savings and additional earnings, and as activists continue to pressure companies to be more financially efficient and productive.

As world leaders agree to this historic document and set the path for a future free of the destructive outcomes listed above, investors have the opportunity as well to make sure they aren't on the wrong financial path.  Nothing will be the same, that much is clear. The Republican candidates for President, so far, have lined themselves up on the wrong side of this history, as have both houses of Congress.

If the rest of the world acts, but we do not, America now runs the risk of becoming less globally competitive.  The financial argument is very clear to the large US companies who have all signed up to this new Low Carbon USA initiative.  If you click on that previous link, you will see a lot of names you recognize, who can see the value imperative of addressing these issues head on.  What you don't see there are a lot of financial services organizations, many of whom are ignoring these issues, or diametrically opposed, or just figuring things out as we speak.  

Apple, Google, IBM & Microsoft on the other hand, have long innovated and evolved exactly along these lines and I'll let you check to see how such innovators have done against the market writ large - very well to say the very least - maybe they should take over financial services while they are it (with trillions of cash in hand and the rise of "robo-advisory services", perhaps that's next, why not).

Investors around the world are starting to change their investment practices, shifting to more positive sustainable investments, engaging more deeply on the subject, and in some cases divesting from coal after a thoughtful process as per our new PRI Framework for Action on Climate Change where I was proud to serve as Lead Consultant this year.  See the previous link for a series of new Case Studies across asset class.

Large institutions from AXA to Allianz to Norges Bank and well beyond are beginning to put these pieces together. Others will soon follow.

Both in the voting booth next November, and with your choice of investments, much of what happens next will be up to you.  

Here's hoping America does what it always does in the end - innovate successfully, seeking to prosper through intelligent choices.