Economic and industrial activity is not being spared by climate change, whose impact is no longer in question. Evidence of this can be found in the recent drought in Taiwan that has paralysed chip production in a context of worldwide shortages. Multiple business sectors that depend on semiconductors have been affected, leading to substantial economic and social damage.

According to a Schroders report¹, climate change has a direct and indirect impact on equity returns that varies between countries, as shown in the following chart:

We can notably see that all countries are not equal in terms of the fall in returns.

For companies operating in the developed countries (located in the majority of cases in the northern hemisphere), the impact of climate change on equity returns is smaller than that for companies located in developing countries.

This can be explained in several ways:

The physical cost, i.e. the impact of rising temperatures on production and productivity. A study by Marshall Burke and Vincent Tanutama² has demonstrated that the rise in temperatures will have a greater impact on the economies of hot countries. We would also note that the poor countries in general are already being affected by major heatwaves.
The cost of the transition, which will take into account the economic impact of resolutions and solutions adopted in order to fight against global warming. We can note that the European companies, pioneers in the sustainable development the ecological transition theme, have positive exposure here. The ambitious plan in support of the ecological transition plan announced by Joe Biden and the commitments of China and Japan will also lend support to companies and accelerate the transition to a decarbonised economy.
Stranded assets corresponding to the devaluation of assets linked to legislative changes, environmental constraints and technological innovations. The fossil energies sector is particularly concerned here given regulations concerning environmental protection and the fight against global warming. The emerging nations will be the most affected, along the lines of India, which is heavily exposed to coal and can anticipate a doubling in its energy consumption by 2040. Taking into account stranded assets alone, India can expect to see its nominal equity returns shrink by around 1.6% over 2021-2050 (chart 2).

Despite greater exposure to the negative effects of climate change, companies in the emerging countries should continue to offer attractive returns (chart 1) in compensation for the risks faced by investors compared to the developed countries (exchange rate risk, political risk, execution risk).

In general, the energy transition is providing incentives for companies to rethink their business and adopt new models, regardless of the sector or country. This is creating new addressable markets for energy services that respond to environmental requirements and challenges. Numerous companies are already well positioned to respond to these requirements and challenges and to benefit from them.

¹ How climate change could impact investment returns over the next 30 years, published by Schroders on 21 January 2021.
² Climatic Constraints on Aggregate Economic Output, by Marshall Burke & Vincent Tanutama, April 2019.

Can climate change affect equity returns?

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