Mitigating the impact of climate change on investment portfolios

Investors are increasingly concerned about the impact of climate change on their investment portfolios. According to a recent survey by Fitch, 46% of respondents fear a negative financial impact from climate change over the next five years. To delve deeper into this issue, CNBC Africa had a discussion with William Atwell, Associate Director for Climate Risk at the Fitch Group. Atwell highlighted two key factors driving investors' concerns. Firstly, there is a significant uptick in ESG (Environmental, Social, and Governance) investing, with sustainable assets seeing a 53% year-on-year increase in 2021. This surge in demand for sustainable investments underscores a growing awareness of the material risks posed by climate change. The frequency of climate-related risk events in recent years has heightened this consciousness among investors, prompting them to evaluate their portfolios' exposure to climate risk. Notably, investments heavily reliant on fossil fuels are particularly vulnerable. The survey conducted by Fitch, with around 500 respondents, revealed that nearly half of investors are worried about climate change's impact on their portfolios in the near to medium term. However, Atwell acknowledged the other half of respondents who may not be as concerned, attributing it to the evolving nature of assessing climate risk. Companies and investors are still developing their approaches to gauge the ramifications of climate change, encompassing both physical risks like Earth system changes and transition risks arising from global policy shifts. Given Africa's pronounced susceptibility to climate change effects due to its natural resource dependence, Atwell emphasized the unique challenges faced by the continent. Economies reliant on fossil fuel exports face the risk of eventual phase-outs, posing a threat to their financial stability. Yet, there are positive strides in climate financing initiatives within Africa, such as the Just Energy Transition partnership, signaling proactive steps to address vulnerability. As financial institutions grapple with incorporating climate risk into their credit operations, rating agencies like Fitch are devising strategies to assess long-term climate vulnerability's impact on credit. Fitch has recently introduced climate vulnerability scores for corporate credits, projecting impacts up to 2050 under a two-degree climate transition scenario. Sectors with high vulnerability scores, particularly in heavily carbon-emitting industries like coal, face existential threats, while sectors like telecommunications and transport exhibit more resilience. In conclusion, the evolving landscape of climate risk underscores the imperative for investors and companies to proactively mitigate potential financial impacts. As the global economy pivots towards sustainability, navigating climate risk will be a critical determinant of financial resilience and success in the coming years.