Climate change will impact assets stretching from U.S. municipal bonds to renewable energy stocks in India, adding another layer of volatility to global financial markets in 2020, according to speakers at the Reuters Global Investment Outlook 2020 Summit in New York this week.
The increasing emphasis on incorporating climate change when analyzing the relative attractiveness of an investment comes at a time when Wall Street companies are discussing the potential risks they face from increasingly powerful and volatile weather patterns at a rate more than double that of last year, according to a Reuters analysis of Refinitiv data.
"Weather patterns are having a direct impact on businesses and leading to massive uncertainty over the short-term and long run," said Dan Ivascyn, chief investment officer at bond giant Pimco.
One of the larger pockets of risk is in the municipal debt market, in which investors in bonds issued by coastal communities in places such as California, Florida, and Texas may be looking past the likelihood of climate-related damages due to the search for yield, he said.
"That is an area where you will see some underperformance due to the climate change issue," he said.
Gregory Peters, managing director, multi-sector and strategy head at PGIM Fixed Income, said that his firm's real estate analysts are playing closer attention to potential climate risks when evaluating pools of residential mortgages in California and Florida.
At the same time, he is investing more in renewable energy firms in India as a way to play the country's population growth.
"It's easy to forecast a more bullish outlook for India. But then you layer on climate and it's a very different thing," he said. "Climate will ultimately be the driver."
Cities across India have been implementing heat action plans that include cooling stations after the nation's capital, New Delhi, recorded its highest-ever temperature of 118 degrees Fahrenheit (48 degrees Celsius) this summer.
The impact of more severe weather will likely affect companies throughout the United States, especially those in agriculture, said Anne Mathis, senior fixed income strategist at fund giant Vanguard.
"It's shifted from rising sea levels to changed weather patterns that influence broader sectors. The weather in the Midwest and how it impacts agriculture is really something that we have to think about," she said.
Historic floods devastated Midwestern agricultural states this spring, prompting some fund managers to reassess how they evaluate the long-term value of companies that make or sell products ranging from tractors to fertilizer.
Billionaire Marc Lasry, the head of Avenue Capital Group LLC, said that he is continuing to raise money for the firm's impact strategy fund, which seeks to fund private companies that are improving the environmental while generating attractive risk-adjusted returns. Among his investments is a company that should be able to reduce fuel costs for trucks by 15%, he said.
"We're looking for areas where we can measure improvements," he said.
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