While 2019 saw an increase in concern over climate change, that concern was only reflected in the valuations of sectors facing elevated transition risk, such as fossil fuel producers.
“We believe valuation dislocations have been limited to a narrow universe of companies because climate change has not been particularly impactful to near-term cash flows for the broader market,” said Maria Elena Drew, director of research for responsible investing at T. Rowe Price. “This is not to say that companies are not vulnerable to climate change today, but more that they are not yet directly feeling the impact.”
A number of sectors are facing secondary impacts from the transition, including manufacturing and construction, transportation, and apparel and textiles.
T. Rowe Price believes that investments will need to be capable of adapting to a +1.5 degrees Celsius or +2.0 degrees Celsius global warming scenario, but even staying within those parameters will mean an increase in inclement weather that will impact the investment landscape, including increased storm frequency, rising sea levels, and shifts in growing seasons.
Investors will also have to be sensitive to how the regulatory landscape would change in a +1.5 degrees Celsius or +2.0 degrees Celsius scenario.
“We believe that almost the entire investment universe will feel some impacts of climate change – through revenues, sourcing, or their cost structure – and companies that can create economic value with a low or zero carbon footprint will be better positioned than their peers in a world of rising environmental regulation,” Ms Drew said.
