Investors are facing increased risks in the coming years as companies become more vulnerable to disastrous climate events, according to Impax Asset Management.
Florida residents continue to repair the damage from Hurricane Idalia and the National Oceanic and Atmospheric Administration is predicting above normal hurricane activity this fall, which puts investors of all types at risk of losing assets to environmental disasters, according to Impax Asset Management.
Hurricanes are only one of the climate-change-created calamities that investors have to take into account when deciding where and how to invest their assets, said Impax, a London-based investment management firm that focuses on sustainable markets.
The problem that investors globally face when making decisions is a lack of information on how companies are dealing with current risks and preparing for a future with a potential for more damaging events, according to Julie Gorte, senior vice president of sustainable investing at Impax Asset Management.
Obtaining pertinent information—which is not readily available now—will be the key to protecting investors’ assets, Gorte said in an interview.
“If you are an insurer, you know most of the facts about a company and the environmental risks of the area where it is located, but if you are an investor, it is difficult to find out,” Gorte said. “For instance, you can find out where some of a company’s facilities are located, but you are not going to know what port their supplies come through.
“And in the future we are going to be faced with a lot more disastrous events,” she said. Insurance companies already are pulling back from insuring property in vulnerable areas because they have more of the necessary information, she added.
The U.S. can expect to deal with 20 environmental disasters a year now, compared to two per year in 1980—and it is only going to get worse, according to the National Oceanic and Atmospheric Administration. Families and companies are just beginning to dig out from the damage caused by the 12-foot storm surges and 165-mile-per-hour winds that hit the Florida coast during Hurricane Idalia. The number of hurricanes is likely to increase, plus there are wildfires, floods and droughts plaguing the world, she said.
“The financial risks of climate change are becoming increasingly apparent, which it is hoped will prompt action from regulators and companies,” Gorte said. “Investors are going to have to be able to find out which companies are best and least prepared to deal with these events.”
In 2020, Impax contacted the companies of the S&p 500 asking these types of questions. Some responded, but most did not, she said. Likewise, some companies that have experienced large losses due to environmental disasters have responded by taking risk assessments and making changes to protect assets in the future, but, again, most have not, she said.
“Flooding, droughts, rising sea levels and other extreme weather events are posing increased risks not only for companies, but their investors, financial markets and the global economy,” New York State Comptroller Thomas P. DiNapoli said when the inquiries were made. “Where a company operates key facilities is a major factor in its exposure to physical risks.”
The information companies provide “is not specific enough,” DiNapoli added. “Investors need much more precise physical location data from companies to help make sound long-term financial decisions.”
Impax said information about the risks faced by companies is important to enable investors to put their money into firms that are well-positioned to take advantage of the current changes, as opposed to those that are unable or unwilling to adapt and are facing risks. “Fundamental analysis which incorporates long-term risks, including environmental, social and governance factors, enhances investment decisions,” Impax said.
“Securities regulators are starting to move in the direction of requiring more information,” but the progress is slow, Gorte said. New European Union regulations require more disclosures than anything required in the U.S., although California is ahead of other states.
When the SEC proposed stricter regulations on disclosures, many of the comments the commission received from companies boiled down to “that’s not possible,” Gorte said. Investors need to become more a part of the process and more research on the risks and potential consequences is needed.
“When research showed that companies with diverse boards of directors made better decisions,” which led to higher profits, companies began to act, she saidm adding that he same impetus is needed to force companies to prepare for environmental disasters.
Investors and financial advisors also need to be aware of the opportunities that will be created in the transition to creating a sustainable environment, Impax said.
Central banks across the world also will need to act, providing funding for projects and companies that are preparing for environmental disasters and withholding funding from risky projects, the company said, adding that if enough calamitous events occur, it will affect the entire economy of a region or country.
Gorte said she is optimistic that people will begin to address the environmental risks, but pessimistic about the possibility of limiting global temperature levels to the United Nation’s goal of 1.5 degrees Celsius above pre-industrial levels.
“We need more political will than we have,” she said. “And all of these efforts cost money that most people are not willing to spend.”