Weathering the Storm: Adapting Investment Portfolios to a Changing Climate
Over the past decade, Americans who have relocated to the desert oasis of Phoenix, AZ, have found themselves on the front lines of one of the greatest challenges to face humanity since we emerged from the African savannah: climate adaptation. Phoenicians watch as exposed pavement is lined with reflective coatings and air-conditioned cooling centers are constructed to help residents cope with the increasing heat that has claimed 133 lives so far in the summer of 2023.1,2 In other corners of the United States, climate adaptation looks different but is just as tangible. Miami has invested approximately $400 million to install pumps and raise streets above the encroaching seas, already a foot higher than a century ago.3 Similarly, Kaua’i County in Hawaii now requires builders to elevate new construction above projected ocean levels.4
Countless other examples illustrate how our infrastructure was constructed for a climate now only visible in the rearview mirror. Interestingly, as our construction standards evolve to meet the moment, the principles governing the construction of investment portfolios have exhibited far less foresight. This inertia poses enormous risks to investors and our financial system. Climate change has now firmly established its presence in the economic landscape as much as the thoroughfares of Miami. As global temperatures rise, so does the urgency for investors to adapt their portfolios to reflect new paradigms that pose risks to their financial well-being. Traditional economic analyses have, for the most part, fallen short in capturing the full extent of how climate change is poised to reshape the global economy. A recent analysis from Carbon Tracker highlights the extreme disconnect between economic and climate projections.
The Bottom Line
Certainly, no one hopes for a wealth-destroying repricing event, just as no one wishes for life-threatening heat waves or rising sea levels. But such hope has not stopped Arizona or Florida from taking decisive action to protect their citizens from very real risks to property and human health. If those institutions are adapting to climate realities, despite ideological leanings, isn’t it incumbent on financial institutions and portfolio managers to do the same?
Climate change adaptation in investment portfolios is not a luxury but a necessity. As the impacts of climate change become increasingly pronounced, investors must recognize that their financial well-being is intricately tied to the health of the planet. By acknowledging the underestimated economic impacts of climate change and taking proactive steps to address the financial risks, fiduciaries can guide investors toward portfolios that are better equipped to navigate the uncertain waters of our changing world.
1 Peters, Adele. 2023. “America’s Hottest City Keeps Getting Hotter: How Phoenix is Battling Extreme Heat.” Fast Company, June 27. https://www.fastcompany.com/90763919/in-phoenix-where-temperatures-continue-to-rise-a-race-against-time-to-weatherproof-the-city
2 Stone, Kevin. 2023. “Metro Phoenix Heat-Associated Death Toll Jumps to 133, Up 44 in Past Week.” KTAR News, August 23. https://ktar.com/story/5531535/metro-phoenix-heat-associated-death-toll-jumps-to-133-up-44-in-past-week/
3 Ariza, Mario Alejandro. 2020. “As Miami Keeps Building, Rising Seas Deepen Its Social Divide.” Yale Environment 360, September 29. https://e360.yale.edu/features/as-miami-keeps-building-rising-seas-deepen-its-social-divide#:~:text=The%20City%20of%20Miami%20Beach,according%20to%20the%20Miami%20Herald.
4 Toussaint, Kristin. 2023. "This Hawaiian County Has a Radical Plan to Deal with Sea Level Rise.” Fast Company, August 21. https://www.fastcompany.com/90940969/this-hawaiian-county-has-a-radical-plan-to-deal-with-sea-level-rise#:~:text=Kaua'i%20County%2C%20which%20is,the%20sea%2Dlevel%20will%20rise.
5 Keen, Steve. 2023. Loading the DICE Against Pension Funds: Flawed Economic Thinking on Climate Has Put Your Pension at Risk. Carbon Tracker Initiative, July. https://carbontracker.org/reports/loading-the-dice-against-pensions/#:~:text=Loading%20the%20DICE%20against%20pension,'no%20regrets'%20precautionary%20approach.
6 Wallace-Wells, David. 2017. “The Uninhabitable Earth.” New York Magazine, June 9. https://nymag.com/intelligencer/2017/07/climate-change-earth-too-hot-for-humans.html
7 International Renewable Energy Agency. 2023. World Energy Transitions Outlook 2023: 1.5°C Pathway. Volume 1. https://www.irena.org/Publications/2023/Jun/World-Energy-Transitions-Outlook-2023
8 Goldman Sachs. 2023. The US is Poised for an Energy Revolution. Intelligence. April 17. https://www.goldmansachs.com/intelligence/pages/the-us-is-poised-for-an-energy-revolution.html
9 Black, Simon, Ian Parry, and Nate Vernon. 2023. “Fossil Fuel Subsidies Surged to Record $7 Trillion.” International Monetary Fund. Blog. August 24. https://www.imf.org/en/Blogs/Articles/2023/08/24/fossil-fuel-subsidies-surged-to-record-7-trillion
10 NOAA National Centers for Environmental Information (NCEI). 2023. U.S. Billion-Dollar Weather and Climate Disasters. https://www.ncei.noaa.gov/access/billions/
11 Mishra, Subodh. 2022. “The Rise of Climate Litigation.” Harvard Law School Forum on Corporate Governance, March 3. https://corpgov.law.harvard.edu/2022/03/03/the-rise-of-climate-litigation/
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