If there is one thing that Glasgow’s COP26 Climate Summit should have taught us, it is the danger of being slow to pick up on new trends that feed into investments.
Of course, our beleaguered Prime Minister Scott Morrison and his fairly lacklustre and rushed grab bag of climate policies and commitments is a prime example but as investors there are even bigger dangers than some political embarrassment in ignoring changing climate policies.
Lots of examples
Examples are everywhere – just ask a happy early investor in the battery metals area for stocks that produce lithium, nickel or copper or someone who was early in the hydrogen boom.
And in the negative, perhaps sympathise with investors who remained long in thermal coal mines, although the recent strong comeback here makes it a less powerful lesson.
The strong message is that the decarbonisation of the world economy is gathering pace and increasingly that means that investors need to consider climate when making those crucial buy, sell and hold decisions.
APRA and RBA already monitoring climate impacts
Fortunately, two of our financial regulators – the Reserve Bank of Australia (RBA) and the Australian Prudential Regulation Authority (APRA) – have promised to monitor the impact of climate change on the financial system.
It also seems highly likely that most, if not all listed companies will end up disclosing their climate risks and opportunities, with UK moves to do just that annually likely to be repeated around the world.
Sophisticated investors and fund managers have long been factoring climate into their decisions, both in a negative sense of companies to avoid and a positive one in selecting winners from the decarbonisation push, and smaller investors really need to follow suit.
UK forcing yearly disclosures
While the UK plan would force companies to reveal their yearly plans and prove they work before an expert panel, it is highly likely that many Australian companies will jump on the bandwagon voluntarily.
In the joint RBA/APRA statement, the RBA said it would “conduct analysis to monitor the implications of climate change and related mitigation policies for the economy and the transmission of monetary policy through financial markets and the banking system to households and businesses.”
APRA said it “considers that effective decision-making by financial institutions needs to include a full consideration of risk, including the potential impacts of physical, transition and liability climate risks.”
APRA has already released guidelines about how financial services companies should manage climate risk, with the big banks stress testing their operations under different climate scenarios.
Get ready for climate disclosures to spread across the ASX
It is not hard to imagine that sort of modelling being spread wider across the much broader range of companies listed on the ASX.
The real issue will be to ensure that such announcements are standardised to some extent so that companies can be meaningfully compared – something that will probably require more regulatory input.
Of course, while decarbonisation could be very difficult and painful for some companies, for others it might prove to be an exceptional opportunity to create new profit centres.
With change comes opportunity
Sometimes these opportunities could come out of left field and other times from serendipity, as new technological solutions might require different materials and services.
One interesting emerging example is the potential for existing energy companies to use their experience in drilling and access to pipelines and underground storage as part of potential carbon capture and storage and for growing the hydrogen market.
For investors and companies alike, the fight against climate change will produce a new environment in which those who see and seize opportunities early stand to do very well while those who remain behind the pace could face an existential challenge.