The impact of climate change on growth will be unevenly spread across countries, with many emerging markets such as India bearing the brunt of the consequences while a few developed countries close to the poles will remain mostly untouched. There will be a wide dispersion across sectors in the economy as well. According to the International Monetary Fund (IMF), the median effect of a 1º C annual increase in average temperature on annual GDP per capita growth is minimal for advanced economies, which tend to have colder climates on average.
ESG at PGIM Fixed Income
A HIGHLY UNEVEN IMPACT ACROSS COUNTRIES AND SECTORS
The transition to a low-carbon economy is already underway, creating the threat of stranded carbon assets. This is often referred to as transition risk. This is apparent in both the relative shrinking of the oil and gas sector in global markets and the coincident rapid expansion of renewable energy. However, there is a long way to go before arriving at a new, low-carbon economy. Fossil fuels (i.e., coal, oil, LNG and natural gas) account for nearly 80% of global energy consumption today and are projected to still account for about 70% of global energy consumed in 2050.¹
ESG at PGIM Fixed Income
Since 2015
A prolonged sunset for fossil fuels
The US Department of Defense has cited climate change and a myriad of second order effects – food and water scarcity, zoonotic diseases, climate-induced migration – as “threat multipliers.”² This will exacerbate existing social and political tensions such as poverty and inequality and even spark new geopolitical conflicts. These knock-on effects from climate-driven stresses are likely underweighted on investors’ agendas.
ESG at PGIM Fixed Income
Since 2015
Indirect effects from climate change could be very significant
DESERTIFICATION, DROUGHT & WILDFIRES
UNEVEN IMPACTS
ENERGY TRANSITION
PGIM PrIVATE CAPITAL
INDIRECT EFFECTS
QMA
DESERTIFICATION, DROUGHT & WILDFIRES
UNEVEN IMPACTS
ENERGY TRANSITION
PGIM PrIVATE CAPITAL
INDIRECT EFFECTS
QMA
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IN PURSUIT OF YIELD ACROSS ASSET CLASSES
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There Is Wide Divergence in Climate Risk Across Emerging Market Countries
Source: Notre Dame Global Adaptation Initiative Country Index, data released July 2020
Share of Global Energy Consumption by Source, 2020-2050
Source: “Annual Energy Outlook 2020,” US Energy Information Administration, January 2020.
The Economic Impacts of Climate Change Will Be Distributed Unevenly Within the US
Source: Solomon Hsiang, et al., “Estimating Economic Damage from Climate Change in the United States,” Science, June 30, 2017
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