Climate change is big news — both bad and good — for long-term investors, according to a recent report from Nuveen.
“The bad news? The longer your time horizon, the more climate change risk is compounding. The good news? Effectively managing your exposure can help add alpha and manage risk,” the report states.
Stephen Liberatore, lead portfolio manager for TIAA Investments’ responsible investing fixed income mandates at Nuveen, talked to ThinkAdvisor about how important climate change has become to investors.
“One of the things that most people have started to recognize and acknowledge is that climate change as an issue is not so much about only saving the environment or improving the environment,” he said. “There’s a material financial risk to not doing it.”
For example, Liberatore described how insurance companies are “obviously very keen and very much focused” on climate risk because that is a potential risk for them in what they’ll insure and how they insure it.
“You will see how all companies now have to be focused on the impacts of climate change because it will influence where they put a facility or where they will build or expend [capital], because if it’s in an area that maybe is more prone to hurricanes or floods or landslides you’re not going to put a facility there,” Liberatore explained.
In Nuveen’s view, addressing climate change risk is critical to adding alpha while reducing risks and avoiding catastrophes — in every asset class that adopts a long-term view.
In particular, here are Nuveen’s views on how climate change can affect stocks and bonds.
Companies that successfully account for the impact of climate change have the potential to perform in line with — or better than — their peers, according to Martin Kremenstein, head of retirement products and exchange-traded funds at Nuveen.
For example, he writes in the report that the MSCI Low Carbon Target Index modestly outperformed the MSCI ACWI since 2010.
Looking ahead, climate-related risk is predicted to compound over time. Kremenstein writes that this means that “climate-attuned portfolios have the potential to outperform amid tighter regulations, faster technological changes or more frequent catastrophic weather events.”
According to Kremenstein, companies may be able to generate added value for shareholders by offering solutions that meet the needs of a low-carbon economy.