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What will be the financial impact of climate change?

The concept of Climate Change will not be new to most of us - first becoming news 30 years ago - and with Great Thunberg's valiant global campaign to raise awareness, as well as widespread climate change protests by groups such as Extinction Rebellion, it has now become the “hot topic”since 2019.

Indeed, with many world governments hotly debating its social, economic, and medical impact on the global population, climate change looks to be an issue that is here to stay; with both the World Health Organisation and the World Economic Forum recently listing extreme weather and climate change as the gravest threat to humanity in 2019.

That climate change should be taken into account when talking about investments has also been noticed by BlackRock, world's largest asset manager, who recently announced that it will put sustainability at the core of its investment decisions.

BlackRock will adjust its investment approach by taking measures such as reducing its exposure to fossil fuel companies, one of the key points demanded by environmental activists.

With all this ominous speculation taking place, then, many of us will be asking the question: what will be the long term financial impact of climate change on our personal finances, savings, and investments?

Impact on investments

It may come as no surprise that the climate change crisis will create investment “winners” and investment “losers”. A report published by the IFC titled “Investing in a time of climate change” modelled four separate scenarios between the years 2015 and 2050, allowing them to identify and analyse the potential impact of climate change on investment returns in specific sectors and asset classes.

They suggest that the energy sector will be most heavily impacted; with traditional industries such as coal (now seen as “dirty fuel”) taking the biggest hit - potentially falling anywhere between 18% and 74% over the next 35 years - whilst the renewable sub-sector would come out as a real winner, potentially seeing “average annual returns increase by between 6% and 54%” over the same 35 year period.

A surprising outcome of the report are the results concerning investments in the timber and agricultural sub-sectors: they indicate that they have the biggest potential to swing between offering the largest gain, or reduction in returns, depending on the scenario run. They indicate that a deciding factor on whether these investments would “win” or “lose” is dependent on how much the global temperature rises. A +4°C scenario, for example, could negatively impact emerging market equities, real estate, timber and agriculture. However, they posit that for investors with a well diversified, long-term portfolio a +2°C scenario does not appear to have negative return implications.

What they do say, however, is that no matter which way you look at it climate change (under the scenarios they modelled) will have an impact on investment returns, so all investors need to start factoring it in as a variable when it comes to making their decisions.

The announcement by Larry Fink, CEO and Chairman of BlackRock, was also welcomed by critical groups and environmental activists including Extinction Rebellion. "Our priorities include making sustainability an integral part of portfolio building and risk management; moving away from investments that pose a high risk to sustainability, such as coal producers; launching new investment products that shield fossil fuels; and strengthening our commitment to sustainability and transparency in our investment management activities".

Impact on savings

Many would argue that with the future of the world potentially in dire jeopardy, there is no point in saving if there will be no future in which to spend it. However, not saving money simply because you are uncertain of the future will only hurt you and your future dependents.

Whilst it is unclear what exact impacts climate change will have on personal savings at this moment in time, as variables such as inflation or economic stability are difficult to predict long term in times of change, it’s worth considering that due to alterations in climate and temperature there may be call for many individuals to; rebuild, move away from their homes if they are in high risk areas and start again, or to purchase new technologies that will assist them in living in their altered realities. To this end, it is worth considering that having savings for an uncertain future is a necessary safety net in order to ensure you are able to manage any changes that may occur in the future.

Finally, some climate change experts say that you should continue to save for long term goals - such as retirement - as many of the most dire changes forecast are set to occur in the later half of the century; a time at which many of today’s young people will be reaching retirement age. It also means that there is still a significant amount of time for alternate fuel and energy sources to be developed and implemented that may yet divert some of the most severe climate warnings.

Oval Money does not provide financial advice. If you need further information we suggest you look for expert advice.

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