The global climate is an enormously complex system, and as climate change intensifies, damaging events are cascading from one another. For example, shrinking Arctic sea ice drives changes in temperature circulation in the Atlantic Ocean, which leads to more frequent droughts in the Amazon rainforest. The interactions are sprawling and global.
They also pose a challenge for investors in translating climate change into risks and opportunities for individual issuers and advocating for improved management, strategy and governance. Getting a better handle on climate science can sharpen these tools. It might mean better tracing of transitional and physical climate risks to income statements and balance sheets. Or it might mean more acumen in interpreting the results from climate change scenario analysis models.
The intersection of climate science and investing can help investors answer broader questions, too. That’s the objective of a series of joint research initiatives between AB investment teams and climate experts from the Columbia Climate School. The topics are diverse, ranging from the consistency of renewable energy sources to the relationship between ocean changes and Baltic salmon farms.
Renewables reliability
Renewable energy sources are critical to the transition to net zero carbon emission. However, the sun doesn’t always shine, and the wind doesn’t always blow. Weather patterns vary substantially, an uncertainty that can wrinkle investors’ assessments of new energy projects, often on short notice.
The financial potential of a proposed wind farm, for instance, relies heavily on how consistently wind currents flow in a specific location. Issuers’ projections are often rosy, and the available historical data may not capture the changes in climate we’re already seeing. Can investors shed light on how local climate patterns and changes affect renewable sources?
AB investors and Columbia climate specialists are exploring ways to answer that, including tapping into a global database of wind patterns in areas including Brazil, India, South Africa and Chile. But a challenge is that not all countries have ample coverage from weather monitoring stations. India, for example, has only 18 stations nationwide.
Ocean temperatures and salmon fisheries
Salmon aquaculture – the raising of them in specialized fisheries – is a rapidly growing industry. It requires a complex, multi-stage process involving onshore and offshore storage pens, freshwater and saltwater operations and facilities with tightly controlled temperatures.
Rising sea temperatures and ocean levels can disrupt this careful balance and the financial fortunes of salmon fisheries. So can secondary impacts, such as harmful algal blooms and sea lice. Salmon farmers’ abilities to manage these factors can mean the difference between a successful business and a struggling one.
A joint AB-Columbia working group is seeking to enhance investors’ visibility into these issues, and also potentially to get a better sense of which areas may be more at risk as algal blooms migrate. Both factors can have a sizable impact on individual salmon farms.
One key challenge is that climate variations are extremely local for salmon farms clustered around fjords on the North Sea coast of Norway, the world’s biggest salmon producer. Segmenting the country into regions, assessing base-case oceanic conditions and possible variations is one approach the working group is considering. With this knowledge, investors could assign individual farms to risk cohorts.
Synthetic biology
Synthetic biology is the science of modifying genomes to create novel organisms. It’s a process that can provide innovative raw materials and services as well as a broad range of new products, from medicines to adhesives.
This science could transform the environmental footprint of our daily lives, whether it’s using atmospheric carbon dioxide as a production input or engineering fully biodegradable watch straps from spiders’ silk. Increasingly, advances by individual companies can enable progress toward the United Nations Sustainable Development Goals, creating investment opportunities along the way.
Pinpointing these future opportunities isn’t easy. AB investors are working with Columbia experts in earth and environmental engineering, biomedical engineering and chemical engineering to better understand the state of the art in synthetic biology, trends that might drive broader commercial adoption and possible environmental applications.
Mapping out physical risks
Countless investment decisions expose portfolios to risk from natural disasters, particularly those intensified by climate change. Existing tools that apply geospatial data to inform hazard risk aren’t as effective as they could be – they may lack the level of detail needed, exclude climate change data or have data issues.
AB investors are working with the National Center for Disaster Preparedness at Columbia University’s Earth Institute to upgrade the Center’s US Natural Hazards Index, which was designed in 2017 to help people prepare for emergencies. The popular index has also been deployed by businesses, including the banking industry and those that manage municipal bond ratings.
The joint project will seek to upgrade data, including adding new data on hazards and social vulnerability. Also on tap are identifying AB data sources for integration and considering new functions, such as the ability to upload portfolio holdings to assess risks. Down the road, the team will work to integrate climate change projections to enable better accounting of future risks and potentially develop international versions of the tool.
These joint research initiatives are at the heart of the intersection of climate science and investing. The goal is to develop a deeper understanding of how to translate climate knowledge into better investment decisions – and ultimately better outcomes.
Sara Rosner is the director of environmental research and engagement for responsible investment at AB.
