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 remaining 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
Fixed Income: Mispricing Creates Long-term Opportunities for Active Investors
There is growing evidence global warming is leading to an increase in storm severity. Warming oceans have created higher-intensity hurricanes in the North Atlantic and cyclones in the South Indian oceans, leading to more storms achieving category 3 or higher intensity.⁴ Indeed, the number of named storms in the Atlantic hit a new record in 2020.⁵
ESG at PGIM Fixed Income
Public / Private Equity & Venture Capital: Navigating the Green Transition & Game-changing Technologies
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.”44 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.
Real Assets: Deploying Technology to Protect Assets and Uncover Opportunities
PUBLIC / PRIVATE EQUITY & VENTRUE CAPITAL
PUBLIC / PRIVATE EQUITY & VENTURE CAPITAL
PGIM PrIVATE CAPITAL
DESERTIFICATION, DROUGHT & WILDFIRES
PUBLIC / PRIVATE EQUITY & Venture CAPITAL
PGIM PrIVATE CAPITAL
IN PURSUIT OF YIELD ACROSS ASSET CLASSES
Share of Global Energy Consumption by Source, 2020-2050
Source: “Annual Energy Outlook 2020,” US Energy Information Administration,January 2020.
Adopt a framework that considers both climate vulnerability and readiness.
Opportunities for active investors to discern between winners and losers where markets do not.
US Municipal Bonds
With most muni investors motivated by favorable US tax treatment, climate risk is largely overlooked.
Long-term active investors can find climate-resilient municipal debt without foregoing yield.
The long sunset for fossil fuels creates opportunities in midstream energy infrastructure (e.g., pipelinesand refineries).
US Property and Casualty Insurance
New sources of capital and advances in underwriting have enabled top P&C insurers to bettermanage exposures.
Climate events are likely to drive US demand for P&C coverage and expand the market for the top players.
Investors are structurally insulated from physical risks to underlying collateral in ABS.
In the agency MBS market, government-sponsored entities absorb much of the climate risk around theunderlying properties, not investors.
Public and Private Equity
Significant divergence in climate sensitivity across sectors and countries creates opportunities fordiscerning, active equity investors.
Capture opportunities for long-term outperformance with the “greenest” firms within brown industries.
For ESG-focused investors, evaluate the benefits of pure exclusionary approaches vs. selective engagement with fossil fuel companies given their long sunset and improved data disclosures.
Evaluate potentially transformative early-stage technologies: hydrogen power and carbon captureand storage.
Integration of renewable energy with better power storage, smart grids and superconductive transmission networks.
Electric vehicles: Seek technological innovations in key components like improved battery storage andrecharging efficiency.
Cutting-edge climate forecasting, analytics and modeling tools to help manage and reduce risk for thefinancial, agriculture and infrastructure sectors.
Next-generation construction materials like exterior paint that reduces heat absorption and cooling costs.
Leverage next-generation climate analytics to capture opportunities where the broad market seesmostly risk.
Consider capital projects to enhance climate resilience of high-risk properties that make lease paymentsmore durable.
Aging energy infrastructure creates new opportunities in solar and wind projects in Latin America.
Less predictable rainfall creates new investment opportunities in water desalination, transportand filtration.
Enhance cash flows and increase usage of toll roads by installing electric vehicle charging stationsand plazas.
Ag tech innovations: Deploy advanced root sensors, vertical farming, drip irrigation and variable ratetechnology to adapt to changing weather patterns.
Generate renewable natural gas from livestock production.
Shifting consumer preferences for alternative protein creates opportunities.
Reforestation and timberland: Capture growing corporate demand for verifiable carbon offsets to fulfillclimate pledges.