Climate change and emerging markets: assessing opportunities and challenges

Emerging markets are on the front lines of climate change. Aware of the challenges, many EM companies are developing solutions, shifting business models and realigning corporate policies to help them prepare. Two of our EM portfolio managers share insights on the investing landscape and offer a framework for incorporating climate-related themes into a portfolio.

Views expressed are those of the authors and are subject to change. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional or institutional investors only.

Key points

  • Our research shows that climate change will affect emerging markets (EMs) unevenly.
  • Given the differentiation of climate impacts, an investment framework may be constructive.
  • We believe engaging with companies to help them build climate resiliency can reduce risk and unlock value.

Emerging markets (EMs) are on the front lines of climate change, facing challenges that could hamper economic development and jeopardise human health and capital assets. Physical climate risks such as extreme heat, droughts, supernormal rain events, water scarcity and poor air quality have already created systemic problems for many EMs. At the same time, transition risks stemming from changing policy and regulations can pose financial headwinds, particularly for carbon-intensive industries.

Companies across EMs, in a variety of countries and sectors, are preparing for climate change, either by developing innovative products that help society adapt to climate change, or by shifting business models and corporate policies to mitigate the risks. In this paper, we explore the intersection of EM investing and climate change by outlining investment opportunities and challenges and providing a framework for incorporating climate-related themes into an EM portfolio. We also share how we engage with companies to help them become more sustainable and competitive by preparing for climate change.

Why climate is a concern for EMs

Our work with Woodwell Climate Research Center (WCRC), formerly Woods Hole Research Center, the world’s leading climate-research institute, studying the effects of climate change on capital markets confirms that EMs face significant headwinds from increasing temperatures which can exacerbate weather volatility, rainfall variability, water scarcity and droughts. According to WCRC projections, within the next few decades, many developing countries will experience multiple additional months with average daytime temperatures over 35° C (95° F), which can negatively impact human health and crop yields. (Figure 1).

FIGURE 1

Changes in days of extreme heat over reference period

Northern India is already experiencing deadly heat waves, defined as three or more consecutive days of 30°C “wet-bulb” temperatures, characterized by heat and humidity levels that prevent evaporation, such that the human body is unable to cool itself. The probability of these heat events occurring will continue to rise. China’s temperatures are also rising quickly, making extreme heat waves a greater threat for the world’s second-largest economy. By the next decade, our work shows that…

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