SINGAPORE (Apr 22): Most investors have traditionally focused on ensuring their portfolios generated the maximum amount of returns on their capital. But attitudes, especially among institutional investors, are changing. The focus now is on mitigating risk rather than maximising returns. French investment manager Amundi Asset Management puts it down to a combination of stricter regulations everywhere and the inability to bear significant losses — particularly in the case of pension funds — a legacy of the global financial crisis and European sovereign debt crisis.
And the risks that are apparently top of mind for institutional investors are those in relation to climate change. In the World Economic Forum’s annual Global Risks Perception Survey, respondents were most concerned about the impact of extreme weather events, natural disasters and the failure of climate-change mitigation and adaption.
To be sure, the impact of climate change on businesses has been well documented. The main costs of extreme weather events is the damage wrought to physical infrastructure such as roads, ports and factories, which in turn disrupts business operations and supply chains. What’s more, businesses located in particularly vulnerable areas, such as on the coastal areas where most development is anyway, run the risk of being uninsurable. That in turn raises the question of whether they are viable at all.
The Global Risks Landscape 2019
A good number of investors, both institutional and retail, are already assiduously avoiding investments that have an obviously negative impact on the environment, such as fossil fuel businesses. Such enterprises are also losing lenders; most recently, Oversea-Chinese Banking Corp in Singapore joined the ranks of banks cutting off loans to polluters.
The broader underlying trend is the push towards environmental, social and governance investing. However, where the environmental aspect is concerned, much of investment strategy is still focused on the transition risks related to a business’ adaption to a low-carbon economy. Additionally, it depends on a company’s ESG disclosures, which may not provide investors with a full picture.
As a result, institutional investors are now pushing their managers to add another dimension of risk management — a quantitative assessment of how climate change-related events will impact a business. According to research by market intelligence firm Four Twenty Seven, businesses are susceptible to three main categories of risk — operations, supply chain and market risks. The level of risk a business is exposed to depends on where it is located, the materials, equipment and labour it needs to operate, and where its customers are. The utilities sector, for instance, would be among the most exposed to all three risks, likely because its supply chain is reliant on resource-intensive commodities, its facility is located in a vulnerable site or because its customer base is local. Conversely, a software and services business would be less at risk probably because it does not depend on physical materials and property for its operations.
Despite the obvious case for it and pressure from institutional investors, physical climate risk assessment is not commonly applied in investment strategies today. Where it is, it must reach retail investors, who are likely even more in need of such risk mitigation, and who have the most to lose in the event of a climate catastrophe.
This story appears in The Edge Singapore (Issue 878, week of Apr 22) which is on sale now. Subscribe here
