Evaluating Climate Change Critical in ESG Integration

Climate change, if left unchecked, will likely have such widespread implications that it could threaten the stability of the global financial system.

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Climate change is a critical theme in environmental, social, and governance (ESG) integration. It’s a sophisticated issue encompassing many material trends that are critical for both investors and the companies we invest in to understand.

The primary issue I would highlight for anyone in thinking about climate change is that its impact, if left unchecked, will have such widespread implications in society that it would be a threat to the stability of the global financial system, as outlined by the Financial Stability Board and increasingly by central banks around the world.

At a high level there are two parallel themes for investors to track on climate change. The first is related to how the corporate sector participates in the mitigation of climate change through emissions reductions. The second is about understanding the delta between the ideal temperature-change scenario, which is achieving net-zero emissions by 2050, and the actual trend line of emissions reduction and temperature change.

Tracking the reality of the environmental implications will be critical to companies mitigating risk and capitalizing on opportunity optimally. Investment analysis includes tracking best practices, sustainable solutions, regulation, and risks and opportunities.

In the tech sector, data-center technology that is developed to produce significant energy savings could enable customers to lower their value-chain carbon emissions. The energy savings could result in reduced energy costs, and those savings could also get passed through to the consumer as a competitive advantage.

In the consumer sector, a company could set a science-based target to reduce its emissions, and in measuring the company’s carbon footprint the management team could realize that one of the key contributors to emissions is in its packaging. That would trigger the company to rethink the materials it uses in packaging.

In the industrial sector, a building materials company could track the reality of climate change and identify that the temperature change will be more severe than the 1.5 to 2 degrees targeted in the Paris Accord. The management team could identify that as an opportunity to develop roofing products that are significantly more resilient to severe weather, creating a competitive advantage for that company over time.

As investors, tracking the emerging and evolving best practices and solutions across sectors is critical to developing insights. This is a new and exciting area of analysis and will produce a broad range of both risks and opportunities to incorporate into investment analysis.

Shivani Patel is a sustainability analyst on William Blair’s U.S. growth and core equity team.

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