The forces driving climate change are growing stronger but geopolitical risks and the pushback against environmental regulation pose significant challenges to further progress in tackling climate change and protecting the environment.
In the latest article from AXA IM, Virginie Derue, AXA IM’s Head of RI Research, looks at how building resilience to climate change is set to become an even more critical focus of sustainable finance in 2025, with investors increasingly needing to integrate these concerns.
Key points from the article include:
The financial risks of climate change are getting worse
- Climate change has caused over $3.6trn in damage since 2000, and without urgent action, it is thought that global GDP could drop by up to 22% cumulatively by 2100.
- The current global political environment appears more prone to delay than acceleration when it comes to regulatory action and a general backlash on climate action would be problematic.
Investors must ask more questions as extreme weather becomes more frequent and costly
- The ICC highlighted that extreme weather has cost the global economy more than $2trn over the last decade.
- Investors need to consider several key questions: how are corporates assessing the materiality of climate-related risks? What aspects are the most material? What geographies and activities are most at risk? How much capital is allocated to enhance business models’ resilience, including the sourcing of raw materials?
Building climate resilience is key
- Investing just 2%-3% of cumulative global GDP in mitigation and adaptation measures could prevent 10%-15% in GDP losses over this century.
- With more than half of the world’s population living in urban areas, cities have a key role to play in building resilience – institutional investors also have a role by stepping up advocacy efforts with governments and city leaders.
The value of water must rise up investors’ agenda
- There is a twofold water crisis – one of quantity as well as quality. Valuing water must accordingly rise up investors’ agenda – potential opportunities for both equity and fixed income investors, the latter including green bonds issuance.
Ocean risks must be central to efforts – UN Ocean Conference in June could be important milestone
- Sustainably minded investors should include the ocean in their agendas and stewardship efforts – they’re a major carbon sink, absorbing up to 30% of human-induced carbon dioxide emissions as well as its role as a biodiversity reservoir.
- The UN Ocean Conference that will be held in June 2025 in Nice, France, could be an important milestone preserving and supporting more sustainable life under water.
AI can help assess risk – but energy demands raise concerns
- AI can enhance climate risk assessment, but its growing energy demands raise concerns – data centres consume 1%-2% of global electricity, projected to hit 21% by 2030. Microsoft have seen 30% emissions increases due to AI-driven expansion.
Risks creating opportunities
- Climate adaptation and mitigation create potential opportunities across equity, fixed income, and infrastructure sectors.
- While shifts in US climate policy are concerning, global trends indicate that the push toward sustainability will continue.
Main image: agustin-lautaro-SH_oYiwg224-unsplash
