For the future of the world’s economies and the people who live in them, climate change can no longer be ignored—and investors may have a role to play.
CONSIDER THESE DISTURBING STATISTICS: By 2050 there could be as many as 1 billion climate refugees fleeing water scarcity, crop failure and rising sea levels.1 In the U.S., extreme weather events already cost anywhere between $300 billion and $500 billion every five years.2 And almost one-third of the world’s population is exposed to deadly heat levels for at least 20 days a year.3
“Climate change is not just an environmental issue,” says Savita Subramanian, head of Environmental, Social and Governance (ESG) Research and U.S. Equity and Quantitative Strategy for BofA Global Research. “It has strong implications for society at large.” Its potential impacts on both humans and the global economy are nothing short of seismic.
Why many investors are paying attention
As the world looks to develop solutions to these challenges, investors could have an important role to play, says Haim Israel, head of Thematic Investing for BofA Global Research and lead author of a wide-ranging report on the topic titled “Emission Impossible?”. He points to three key developments that are pushing climate change to the front of many investors’ minds.
“The economics of climate change solutions have been shifting for the better. This problem used to be very expensive to address. That’s not the case anymore..”—Haim Israel, head of Thematic Investing, BofA Global Research
“First of all, there’s public understanding that climate change is not a myth,” he says. That is driving activism at all levels and prompting companies to raise capital for clean measures such as supporting reforestation, shifting to renewable energy sources or simply being more transparent about their carbon footprint. “Secondly, Wall Street and the capital markets are getting behind finding viable solutions, and we are seeing more money going to companies that have environmental policies,” Israel says.
The third, and most fascinating, development is that “the economics of climate change solutions have been shifting for the better,” Israel says. “This problem used to be very expensive to address. That’s not the case anymore.” He notes that it’s now cheaper to produce energy from renewable sources, like solar and wind, than fossil fuels. In the U.S., there are now three times as many clean energy jobs as there are in the fossil fuel industry.4 As a result of these changes, Israel’s team calculates that the climate solutions market could double from around $1 trillion at the start of 2020 to more than $2 trillion over the next five years.
The numbers speak for themselves on the potential consequences if we fail to act fast on enacting climate solutions. Here, a look at the impact on the planet’s people and places.
The past five years were the hottest since records began, and the 20 warmest years on record were in the past 22 years.
Source: NOAA, NASA, 2019.
By 2100, heat stress linked to climate change could cost the global economy $2.4 trillion every year in productivity and economic losses, most notably in agriculture and construction.
Source: International Labour Organization, 2019.
In the U.S., 40% of all cities in 2018 were affected by some form of extreme weather—such as a storms, droughts, heat waves, floods or wildfires—compared with only 15% to 20% during the 20th century.
Source: NOAA National Centers for Environmental Information, 2020.
Water scarcity is likely to worsen due to warming, ice melt and heat waves. Two billion people currently live in countries or regions experiencing high water stress, and by 2030, an estimated 700 million people could be displaced by intense water scarcity.
Source: United Nations, 2019.
Indonesia is spending $34 billion to move Jakarta, its capital of over 10 million, inland, because of rising sea levels and increasing floods. And by 2050, more than 800 million people around the world could be at risk from rising sea levels brought on by global warming.
Source: Indonesian government, 2019; C40 Cities, 2020.
Climate change and the coronavirus
“We continued to see strong investor interest in sustainable investments, even during the dramatic sell-off that started earlier this year.”—Savita Subramanian, head of Environmental, Social and Governance Research and U.S. Equity and Quantitative Strategy, BofA Global Research
But how do we stay focused on the long-term (or even medium-term) picture when more immediate concerns, such as the coronavirus pandemic, are creating economic disruption and uncertainty? Subramanian notes that ESG exchange-traded funds saw continued inflows during the recent market turmoil (based on weekly flows between January 9 and March 18, 20205). “The idea that climate concerns go away during times of stress is false,” she says. “We continued to see strong investor interest in sustainable investments, even during the dramatic sell-off that started earlier this year.”
Additionally, the pandemic has sped up the adoption of many climate-friendly and energy-efficient solutions, some of which may be here to stay. “The pandemic has really hastened the mission to have a lower carbon footnote from both a technology and an industrial perspective,” Subramanian notes. “Companies have realized they don’t need to fly people out to Hong Kong five times a year and can do a lot more through video conferencing and chats and apps on their phones than they have in the past,” she adds.
5 industries creating climate solutions
While some potential energy-efficient solutions—such as increased investment in public transportation—may be adversely affected by the coronavirus in the near term, Israel believes the world will continue to seek out ways to reduce its carbon footprint. “It’s not just our kids’ problem anymore,” he adds. Here are a few of the promising areas that Israel says could play a pivotal role in driving climate solutions now—and into the future.
The bottom line is, everything in our planet is connected. And as the Earth’s climate changes, every corner of society—wealthy or poor, giant corporations or solitary individuals—will be affected. This also means that everyone will have a role to play in helping build a more sustainable world in the coming years. “The 2010s were a lost decade when it comes to ameliorating climate change,” says Israel. “As we head into the 2020s, we need to move forward very fast.”
Click + for more insights.
The ABCs of Investing in Climate Action
“The current pandemic has given us a sense that we’re all in this together, and that’s also true for the threats presented by climate change,” says Jackie VanderBrug, head of Sustainable and Impact Investment Strategy in the Chief Investment Office for Merrill and Bank of America Private Bank. For those interested in investing in climate solutions, VanderBrug suggests considering a three-pronged “ABC framework.” Here’s how it works.
This ABC framework allows you to ask yourself what you hope to achieve with your investments, and then to pursue those goals with a variety of solutions, VanderBrug says. Of course, each investor is different, and investing in climate action may be only one of several strategies you could employ.
As always, speak with your advisor about the type of investments and strategies that are most appropriate for you.
Connect with an advisor and start a conversation about your goals.
9am - 9pm Eastern, Monday - Friday
Information is as of 06/10/2020
Opinions are those of the author(s), as of the date of this document and are subject to change.
Investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results.
This material does not take into account a client’s particular investment objectives, financial situations, or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security or investment strategy. Merrill offers a broad range of brokerage, investment advisory (including financial planning) and other services. There are important differences between brokerage and investment advisory services, including the type of advice and assistance provided, the fees charged, and the rights and obligations of the parties. It is important to understand the differences, particularly when determining which service or services to select. For more information about these services and their differences, speak with your Merrill financial advisor.
Bank of America, Merrill, their affiliates, and advisors do not provide legal, tax, or accounting advice. Clients should consult their legal and/or tax advisors before making any financial decisions.
The Chief Investment Office, which provides investment strategies, due diligence, portfolio construction guidance and wealth management solutions for Global Wealth & Investment Management ("GWIM") clients, is part of the Investment Solutions Group (“ISG” )of GWIM, a division of Bank of America Corporation (“BofA Corp.”).
BofA Global Research is research produced by BofA Securities, Inc. (“BofAS”) and/or one or more of its affiliates. BofAS is a registered broker-dealer, Member SIPC, and wholly owned subsidiary of Bank of America Corporation.
Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.
Impact investing and/or Environmental, Social and Governance (ESG) managers may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. Further, ESG strategies may rely on certain values based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating.
An investment in Green Bonds involves risks similar to an investment in debt securities of the issuer, including issuer credit risk and risks related to the issuer’s business. You should review the relevant offering document carefully before investing.
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.
Investments in foreign securities (including ADRs) involve special risks, including foreign currency risk and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are magnified for investments made in emerging markets.
Municipal securities can be significantly affected by political changes as well as uncertainties in the municipal market related to taxation, legislative changes, or the rights of municipal security holders. Income from investing in municipal bonds is generally exempt from Federal and state taxes for residents of the issuing state. While the interest income is tax-exempt, any capital gains distributed are taxable to the investor. Income for some investors may be subject to the Federal Alternative Minimum Tax.
ETF Risk Considerations: ETFs are subject to certain risks that may affect the price, yield, total return and ability to meet its investment objectives, including: general market risks; a particular asset class risk; the fact the funds in the ETF are typically passively managed; concentrations in a particular industry or region and; market trading risks (e.g., lack of market liquidity and trading at prices at or above their NAV). ETF shares may trade at a premium or discount to NAV and may be subject to management fees, transaction costs or expenses. For a discussion of the risks specific to a particular ETF, please refer to the ETF’s prospectus.
Investments in a certain industry or sector may pose additional risk due to lack of diversification and sector concentration.