Viewpoint: Asset owners should look beyond the climate backlash narrative

Cardigans, I’m reliably told, are back in fashion. So too, disappointingly, are ties. Definitely out this season, however, are rational views on climate change.

The transition to a low-emission, climate-resilient economy has never been and never will be linear. It is currently being buffeted by US-led politics with signs of contagion elsewhere. Ambitious national climate commitments and corporate targets are being scaled back, and there is a troubling resurgence of climate denialism.

Although the climate backlash is dominating the current narrative, the trajectory of the transition will be shaped primarily by longer-term fundamentals, particularly economics.

Asset owners are especially vulnerable and stand to lose significant wealth if their response is sub-optimal. While many are correctly focusing on the new investment risks posed by the effects of climate change, there appears to be considerable investment upside in sectors that are expanding rapidly as society seeks to avoid exacerbating climate change.

Rational investors should therefore consider how to position themselves for when market prices reflect attractive fundamentals; those who delay are likely to miss out on a period of profound economic transformation and wealth generation.

Progress in the real economy continues

Although the consensus on climate action has frayed, the direction of travel in the real economy is encouraging. There are signs of strong growth in key sectors, underpinned by hard economics. Three examples stand out:

First, many proven low and zero-emission technologies are already ‘winning’ in key markets. Electric vehicles, which are forecast to hit 26% of global car sales this year, are gaining market share because they are reliable, functional and cheap to run. Meanwhile, solar and wind now dominate new power generation in China, the EU and elsewhere because of lower costs, even without subsidies.

“Ambiguous and politically contentious terms like ‘green’, ‘ESG’ and ‘net zero’ are giving way to a more pragmatic focus”

Ian Simm, founder and chief executive of Impax Asset Management

Second, and related, consumers increasingly benefit from technologies that reduce bills, as well as emissions. Although far from a cutting-edge technology, LED lightbulbs use at least 75% less electricity – and last up to 25 times longer – than incandescent bulbs. Replacing domestic gas boilers with air-source heat pumps can lower UK energy bills by around £100 per year and reduce household heating-related emissions by up to 70%.

Third, rising demand for electricity – associated with the proliferation of energy-intensive data centres and the electrification of transportation and heating – is galvanising faster deployment of grid infrastructure and equipment. An estimated €584bn of investment in European grids is needed by 2030 to meet a projected 60% increase in electricity consumption, supporting opportunities for grid developers and operators, and suppliers of critical hardware and software.

A new, welcome era of pragmatism

Ambiguous and politically contentious terms like “green”, “ESG” and “net zero” are giving way to a more pragmatic focus on jobs, resilience and cost savings. The UK government’s recent decision not to proceed with a “green taxonomy” is a case in point.

Rising financial liabilities from more extreme climate-related weather events are also now front and centre for public and private decision-makers. Reinsurers continue to upgrade their models and tighten underwriting terms, pushing up insurance premiums, providing stronger incentives for companies to better manage climate-related risks.

Governments, meanwhile, are recognising the importance of climate adaptation and are acting to improve the resilience of infrastructure. The World Resources Institute estimates that every £1 invested in adaptation can yield over £10 in avoided losses and economic, social and environmental benefits over 10 years.

Against this backdrop, asset owners should position themselves to navigate the transition through four overarching actions:

First, by sharpening their evaluation of climate-related opportunities and risks at both the asset and portfolio levels.

Second, by pursuing the long-term investment opportunities associated with the climate response, particularly at a time of depressed asset prices.

Third, by mitigating risk through portfolio rebalancing and effective stewardship activities to pivot towards more resilient companies and issuers.

And finally, by proactively advocating for clear policy frameworks that can underpin market growth.

I believe that rational investors who redouble their focus on climate-related risks and opportunities will be rewarded for their thoughtful analysis and proactive investment when the facts reassert themselves over misinformation, and this period of inertia inevitably closes. I fully expect that a consensus will re-emerge as Bill Clinton’s adviser James Carville once famously quipped, “it’s the economy, stupid”.

Ian Simm is the founder and CEO of Impax Asset Management