JPM AM sustainability head echoes IPCC view of climate adaptation and mitigation as “two sides of the same coin”; highlights loss avoidance and investment opportunities.
Investors need to overcome prevailing attitudes to the physical risks of climate change, focusing more urgently on building greater resilience into their portfolios in parallel with efforts to reduce financed emissions.
This will not only protect returns to end-beneficiaries, they were told last week, it will also help address some of the concerns raised by the International Panel for Climate Change (IPCC) in its recent Synthesis Report.
Investors have prioritised investment into addressing climate mitigation over tackling climate adaptation due to difficulties in identifying the associated the risks and opportunities, according to Jennifer Wu, Global Head of Sustainable Investing at JP Morgan Asset Management.
Speaking at the global investment manager’s European Media Summit, Wu said several “misconceptions” about climate adaptation have led to investors discussing it less than mitigation.
“A lot of people think about physical climate risk as something in the distant future,” she said, adding that many view it as an issue of concern for island nations in “emerging and frontier markets” which lack resilience.
Wu challenged this notion, reminding attendees that over the past few years Europe has witnessed record-breaking heatwaves, flash floods and droughts.
“Physical climate risk is not in the distant future. It’s not in a faraway land – it’s here,” she said, calling on investors and policymakers to acknowledge that fact.
In its Synthesis Report, the IPCC said there was a greater need for “climate resilient development”, emphasising the availability of effective and low-cost options for addressing climate mitigation and adaptation together.
“Climate justice is crucial because those who have contributed least to climate change are being disproportionately affected,” said Aditi Mukherji, one of the 93 authors of the IPCC’s Synthesis Report, the closing chapter of the Panel’s sixth assessment.
“Almost half of the world’s population lives in regions that are highly vulnerable to climate change. In the last decade, deaths from floods, droughts and storms were 15 times higher in highly vulnerable regions.”
Quantify the unpredictable
Another misconception is that it’s governments’ sole responsibility to address physical climate risk, Wu said, a concept that she challenged.
“Climate risk is investment risk,” she said. “It exposes portfolios and forces us to look at how resilient we are to the next flood or extreme event.”
According to Wu, the challenge investors face is how to effectively quantify the “unpredictability” of physical climate risks and invest accordingly to adapt to them. However, the complexity of this challenge is “no excuse” for investors not understanding these risks, she said.
Climate adaptation is also lacking sufficient attention from investors is due to difficulties in linking physical climate risks to investment opportunities that generate meaningful benefits, she said.
“There is a misconception that [climate adaptation] doesn’t give you a good return on investment.”
She stressed that climate adaptation is as, if not more, important than mitigation, and investors must begin to incorporate it into their investment strategies.
According to Wu, climate adaptation requires the investment community to not only recognise the need to reduce greenhouse gas (GHG) emissions but acknowledge “the reality that the climate is becoming warmer, the frequency and magnitude of extreme weather events is on the rise”.
According to the IPCC’s Synthesis Report, every increment of warming results in “rapidly escalating hazards”, with intensifying heatwaves, heavier rainfall and other extreme weather events further increasing “risks for human health and ecosystems”.
“In every region, people are dying from extreme heat,” the report noted. “Climate-driven food and water insecurity is expected to increase with increased warming. When the risks combine with other adverse events, such as pandemics or conflicts, they become even more difficult to manage.”
From an investment perspective, climate change adaptation is the attempt to anticipate the adverse impacts of climate change, and then take action to prevent the worst outcomes, said Hugh Gimber, Global Market Strategist at JP Morgan Asset Management, who moderated the session.
Adaptation and mitigation are like “two sides of the same coin – you cannot consider one without the other”, said Wu. “When it comes to decarbonisation (climate mitigation), if we take a short-term view, it could result in unintended consequences.”
Wu highlighted the importance of investing in nature-based solutions that are capable of effectively addressing climate mitigation and adaptation simultaneously, pointing to the economic benefit of mangroves which she said, according to JPM AM research, provide approximately US$80 billion in avoided economic losses from coastal flooding and US$15 billion of co-benefits associated with fisheries, forestry and recreation.
“Forests and wetlands not only remove GHGs from the atmosphere, but they also provide the benefit of preserving soil and protecting biodiversity, both of which are critical to ensure that we have the resilience to combat against the next flood, heatwave or extreme weather events,” she said, reiterating the importance of investors identifying opportunities that can address both mitigation and adaption.
“When mitigation is done right, it’s the best form of adaptation,” she added.
Wu noted that the benefit-to-cost ratio for investing in climate adaptation is 4:1 based on JPM AM data and referenced the concept of the triple dividend of climate resilience.
According to a report by the World Resources Institute, the triple dividend of resilience (TDR) is an approach that considers avoided losses (first dividend), induced economic or development benefits (second dividend), and additional social and environmental benefits (third dividend) of adaptation actions.
International adaptation finance flows to developing countries at up to 10 times below estimated needs and the gap is widening, according to the UN’s 2022 Adaptation Gap report. Estimated annual adaptation financing needs sit at US$160-340 billion by 2030 and between US$315-565 billion by 2050.
Investors have yet to quantify the potential adaptation financing needs in developed market economies, said Wu.
While investors have made significant progress in understanding the direct financial impacts of physical climate risks pose to infrastructure, less is understood about indirect impacts, she said, noting how in 2021 the world lost a total of 470 billion potential labour hours due to extreme heat.
“Some of these risks are obvious, some are not,” she said, stressing the importance of investors looking at climate risks through an adaptation lens to better identify the sectors with the greatest risks and opportunities.
Wu recommended a three-pronged approach to capital alignment which prioritised resilience, adaptation and new technologies.
Investing in resilience is about building capacity to prepare for, respond to, and recover from, significant natural disasters and the impacts of a global warming. Investing in adaptation is focused on minimising the economic impacts of extreme weather events, while investing in new technologies allows industries to adapt to climate-related risks.
“Mitigation alone is not enough to address physical climate risks,” she added.