Integrating Climate Science and Investing

In collaboration with climate experts at Columbia University’s Earth Institute, AB’s investment experts are developing new insights and tools to better enable us to analyze the impact of climate change on financial markets.

 

There’s a growing commercial, economic and regulatory imperative to be more proactive in addressing the complex issues that climate change creates for financial markets. That need is driving AB’s collaboration with leading climate scientists at Columbia University’s Earth Institute to develop a Climate Science and Portfolio Risk curriculum.

The coursework is designed to help portfolio managers, analysts and others better understand, analyze, engage on and integrate climate risks and opportunities in investment analysis. It covers the scientific foundation of climate change, strategies to reduce and adapt to it, policy implications, technological solutions and data sources that augment the investment process.

 

From Climate Science to Investment Analysis

In our view, better understanding of the science behind climate change will help us translate its broad impacts into inputs and tools to sharpen our analysis. As climate change intensifies, for example, population growth will slow and productivity will decline, reducing economic output and hurting corporate profits. Climate change will leave some companies’ assets stranded or impaired, including fossil-fuel reserves. Capital spending will evolve, with more spending for climate-change protection and adaptation. This process will create winners and losers. Fossil-fuel producers, as mentioned, will struggle, while companies that develop new technologies and services that help with adaptation to and mitigation of climate change, including solutions that strengthen physical assets against climate change, will benefit.

 

Tracing Climate Risks to Financial Statements

Connecting climate risks to their impact on individual issuers’ financial statements can help analysts pin down the specifics. A hurricane, for example, might damage physical assets, such as plants or facilities, requiring expensive repairs or even replacement.

Transitional risks from the world’s move toward a carbon-free economy can be revealed by examining companies’ carbon footprints and income statements. For instance, if people avoid high-carbon food sources, and as carbon costs rise, beef producers’ profits will suffer. Firms that produce more efficient technologies like biofuels and smart grids, however, could thrive.

 

What’s Next for AB and Columbia University?

We’re pursuing several possible paths for the next phase of our Columbia University relationship. These include collaborating on climate-related investment research to enhance portfolio decisions, evaluating and maybe developing in-house climate-risk assessment tools, and creating more training modules for global use. We’re also exploring new climate-related products and strategies.