The Paris climate agreement could change the landscape for investors, making lower-carbon companies more valuable, argues Mike Fox
With the ink barely dry on the climate change agreement signed in Paris, it is already time for investors to begin understanding how this changes their investment portfolios.
Investors may have to pay a premium for those companies showing leadership in environmental management as they are likely to be more profitable
A commitment to limit the rise in global temperatures to "well below" 2°C above pre-industrial levels has already been estimated, by entities such as the International Energy Agency (IEA), to require $16.5 trillion of investment by 2030.
This commitment also has the potential to negatively impact a number of industries many investors are exposed to. So what are the implications of Paris and how should investors respond?
Climate change is no longer a minority sport
Climate change is nothing new. Many governments have for a number of years set targets for increased renewable energy generation and energy efficiency. Indeed some of these have been successful.
In the UK, for example, more energy is now generated from renewable sources than from coal. That said, these targets, even when met, still result in the vast majority of energy being produced from fossil fuels. In the UK, 80% of energy is still produced by fossil fuels when renewable energy targets are met. So how would the world look if fossil fuels became the minority and renewable energy the majority?
Oil will remain important but could be an industry in structural decline
As the famous saying about technology goes, in the short-term its impact is overestimated, in long-term underestimated. This sums up the impact of Paris on the oil industry. In the short-term oil and its derivatives will remain the world's key energy source but if the majority of future energy investment goes into technologies designed to marginalise it, how can this be good for the oil industry?
Innovative companies providing products and services with lower carbon intensity may well become as important as those companies created in the early stages of the internet
The oil industry remains a key component of many investment benchmarks and index-orientated investors may, in the coming years, find key parts of their portfolios impaired as the world invests in a lower carbon future.
No company will be immune
Historically, efforts on climate change have largely been centred on the oil and power generation industries. For the Paris agreement to be implemented, all industries and companies will need to play a role.
Indeed, Unilever – one of the world's largest consumer goods companies – has already committed to switching to using only renewable energy by 2030 and stop using energy from coal by 2020.
The impact of events in Paris over the weekend will be with us for decades to come
As governments seek to implement the Paris agreement it is likely the penalties for poor environmental practices will only increase and corporates will have to adjust to making climate change a core principle in how they set strategy. Investors may have to pay a premium for those companies showing leadership in environmental management as they are likely to be more profitable.
New industries will be created
The $16.5 trillion estimated by the IEA will provide a huge source of funding for innovation to occur in the 'climate change economy'. Innovative companies providing products and services with lower carbon intensity may well become as important as those companies created in the early stages of the internet.
Watch out for the next Google and Amazon but this time in the area of energy efficiency, clean energy or energy storage.
Revolution not evolution
Could the 'climate change economy' become as important and as powerful as the 'internet economy'? Only time will tell.
The internet did, however, revolutionise – in both a positive and negative way – many industries and investors would be wise to consider what the impact could be should Paris have a similar influence.
Those investors exposed to oil- and carbon-intensive industries, particularly index-orientated investors, have a material risk to consider.
Those corporates who do not place climate change at the heart of their business strategy may well expose themselves to emerging risks. New industries will be created and innovation will flourish.
Although the precise course of future events is, as always, uncertain the impact of events in Paris over the weekend will be with us for decades to come.
Mike Fox is head of sustainable funds at Royal London Asset Management
