Singapore, Individual

Change chevron_right

Using climate science to uncover investment opportunities

Alan Hsu, Global Industry Analyst
July 2021

The views expressed are those of the author at the time of writing. 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.

Few today would deny the impact of climate change on the planet.

Extreme temperatures, wildfires, droughts, floods, and water scarcity: These and other damaging climate events are becoming more prevalent and severe.

From an investment perspective, climate change creates risks but, as with every risk, it also creates opportunities ranging from mispriced assets to groundbreaking innovation. Many opportunities lie in the need to develop resilient infrastructure and process changes across a multitude of industries, countries, and asset types, as well as in the response to increased policy regulation and the development of technological innovations. As well as the risks, climate science can help uncover these opportunities. At Wellington, we seek to do that through our partnership with Woodwell Climate Research Center.

Woodwell Climate Research Center is a leading independent climate research organization. It was founded in 1985 not just to quantify global climate challenges through world-leading research, but also to partner with stakeholders to bring climate research into arenas where it could have a real-world impact.

In 2018, Wellington began a partnership with Woodwell to integrate climate science into asset management. Together, we started using quantitative models to better understand how and where climate change may impact global capital markets. We have developed investor tools and innovative analytical methods aimed at improving climate risk assessment and investment outcomes, modelling climate-change impacts to directly inform investment decisions.

Whether it’s wildfires in California, Texas winter storms, or floods in Australia, the problem with climate change is twofold: not only changes in the physical landscape, but also an inability to prepare an adequate response for worst-case scenarios, even when the best of our science suggests these are highly likely.

A good example of this is in Chinese agriculture. China is among the world’s biggest producers of corn, soybeans, and wheat, but our research shows that many of China’s regions where these crops are grown experience severe water scarcity, with 40% lying in the twentieth percentile for water scarcity risk globally.1 Data from Woodwell suggests that the likelihood of years when yields are down by 10% relative to historical levels will double for all crops by the middle of this century, with wheat showing the highest likelihood, at 65%. The data also indicates that droughts will increase in severity along an east-west axis from Tibet through Chengdu and Hunan in central China, where drought conditions will persist up to 60% of the time from 2021 – 2050 onwards.2 That means the incidence of drought conditions will have increased by around 80 months per decade relative to the 1971 – 2000 reference period used by Woodwell. This will impact both China and neighboring countries reliant on the Mekong River, which originates near Chengdu.

Surprisingly, the research shows an increase in flooding risk as well as water scarcity — in fact, the two phenomena are linked. A warmer atmosphere can hold more water vapor. So, when a storm forms, rain can fall in large quantities, with a drastic effect on any individual location. China is not prepared to manage extreme precipitation events. Roughly 70% of Chinese cities’ stormwater systems cannot properly deal with a one-in-five-year storm event. And we believe that, by mid-century, historical one-in-100-year and one-in-500-year extreme precipitation events will likely occur with at least five times their historical frequency for most of China, especially east of Chengdu and in the northeast region.

China must not only plan for a water-scarce world; it must also plan for flooding in many of its major cities.

What are the opportunities?

China is one example. But we’ve found that increased levels of climate adversity in agriculturally productive areas around the world will require ongoing investments in agriculture technology to boost crop productivity and crop resilience. The same is true for water infrastructure. Climate solutions related to water can be as simple as flow technology or as complex as smart water solutions that enable us to irrigate more intelligently, dispatch water more precisely, and use it more efficiently. We believe that there is a wide opportunity associated with these themes.

We have also found that China faces one of the highest threats of sea-level rises. That’s why it is building what has been dubbed a new Great Wall — flood defenses centered on the coastal regions of China to protect cities like Shanghai. This and similar projects bring with them an increased need for specific construction materials and flood infrastructure technology.

China and India are likely to be the two largest incremental sources of energy demand in future decades. For economies that are attempting to grow quickly, modernize, and raise per-capita income, access to low-cost energy is key. Today, unfortunately, we still see a reliance on energy forms that we do not view as sustainable, including coal and, to some degree, natural gas. Both countries face a conundrum: They must deploy vast amounts of energy while attempting to diversify their energy sources. It’s thus crucial that China, alongside India, is on a path to decarbonization. From an investment standpoint, this plays into the growth of renewable energy sources globally, as well as alternative fuel use and the redesign of energy infrastructure to increase efficiency.

At Wellington, we are able to match our deep knowledge of renewable energy firms with insights from Woodwell’s climate science on whether local conditions favor wind or solar power generation. This can help to inform our analysis of those companies when we engage with them on managing the productivity of their renewable assets. Blending that information with other fundamental research gives us a good sense of what might be the best regulatory outcomes. It also provides a much more complete picture of the risks and rewards of investment and helps us build a mosaic of insights.

Taken as a whole, our research on climate change leads us to believe that many investors are overexposed to the risks stemming from climate change while being underexposed to the accompanying investment opportunities.

Key topics and themes
Sustainable investing
Climate change
Replay
EMEA
APAC
USA
Written by
Hsu_Alan_4446
Alan Hsu
Global Industry Analyst
Boston, USA

1Woodwell Climate Research Center | 2Ibid.

RECOMMENDED FOR YOU

DISCLOSURES

Past results are not necessarily indicative of future results and an investment can lose value. Funds returns are shown net of fees.
Source: Wellington Management

© 2021 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The Overall Morningstar Rating for a fund is derived from a weighted average of the three, five, and ten year (if applicable) ratings, based on risk-adjusted return. Past performance is no guarantee of future results.

The content within this page is issued by Wellington Management Singapore Pte Ltd (UEN: 201415544E) (WMS). This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. Information contained on this website is provided for information purposes and does not constitute financial advice or recommendation in any security including but not limited to, share in the funds and is prepared without regard to the specific objectives, financial situation or needs of any particular person.

Investment in the funds described on this website carries a substantial degree of risk and places an investor’s capital at risk.  The price and value of investments is not guaranteed and may fall or rise. An investor may not get back the original amount invested and an investor may lose all of their investment. Investment in the funds described on this website is not suitable for all investors. Investors should read the prospectus and the Product Highlights Sheet of the respective fund and seek financial advice before deciding whether to purchase shares in any fund. Past performance or any economic trends or forecast, are not necessarily indicative of future performance. Some of the funds described on this website may use or invest in financial derivative instruments for portfolio management and hedging purposes. Investments in the funds are subject to investment risks, including the possible loss of the principal amount invested. None of the funds listed on this website guarantees distributions and distributions may fluctuate and may be paid out of capital. Past distributions are not necessarily indicative of future trends, which may be lower. Please note that payment of distributions out of capital effectively amounts to a return or withdrawal of the principal amount invested or of net capital gains attributable to that principal amount. Actual distribution of income, net capital gains and/or capital will be at the manager’s absolute discretion. Payments on dividends may result in a reduction of NAV per share of the funds. The preceding paragraph is only applicable if the fund intends to pay dividends/ distributions.  Performance with preliminary charge (sales charge) is calculated on a NAV to NAV basis, net of 5% preliminary charge (initial sales charge). Unless stated otherwise data is as at previous month end.

Subscriptions may only be made on the basis of the latest prospectus and Product Highlights Sheet, and they can be obtained from WMS or fund distributors upon request.

This material may not be reproduced or distributed, in whole or in part, without the express written consent of Wellington Management.