Understanding environmental risk
Environment-related risks can largely be divided into physical risks and transition risks from climate change.
Physical risks: Tangible risks of climate change that could manifest through a rise in sea levels, water stress, droughts, flooding, extreme temperatures and increased frequency of extreme weather events, inter alia.
These phenomena could damage infrastructure, cause supply-chain disruption, result in raw materials scarcity, or harm human health, and more. In addition, climate models also predict that the impacts above are distributed unevenly and will affect certain regions or peoples disproportionately.
Transition risks: Risks to economic and business models that are associated with new carbon pricing or emissions trading schemes, as well as the risk that higher costs of carbon may lead to stranded assets. Transition risks include changing consumer habits and labour market shifts, as well as investment allocation decisions in companies and sectors better suited to a low-carbon economy.
Risk interaction and impact
These two risks frequently interact, and companies can often be affected by either to varying degrees, depending on their business models, geographic locations, pricing power, etc.
To inform our analysis of environmental risks in portfolios, we employ a number of datasets from data vendors. Below, we provide an overview of the data that underlies today’s climate-related investing landscape.
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The views expressed in this material are the views of the ESG EMEA team through the period ended February 2022 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
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Exp. Date: 28 February 2023