The Correlation Between Climate Change and Regional Investment Returns

The topic of climate change is nothing new. Like it or not, it is here to stay and will have a profound impact on the way we live our lives over the next 30 years. Yet as scientists continue to monitor how our efforts are impacting weather patterns and the surface temperature of the planet, economists have also been paying closer attention to how it will affect investment returns.

From an investment perspective, research has found that climate change is already making waves. But, until recently, it has not been possible to specifically quantify the impact global warming may be having on investment performance.

Every year, the Economics and Multi-Asset Investment teams at Schroders produce 30-year forecasts for stock and bond markets around the world. For the first time, climate change has been included in their projections.

In some countries, including the UK, Switzerland and Canada, the negative impact of climate change on the planet’s temperature has actually been predicted to boost domestic stock market returns over the next three decades. This is because a warmer climate should help improve productivity in these relatively cold, and developed, markets.

It is also due to other factors too, such as the costs that individual countries incur in mitigating their impact to rising temperatures – as a fairly low-carbon economy, the costs to the UK in achieving their targets is less than other nations where they have much more work to do.

To put the findings into context, the research showed that annualised inflation-adjusted returns from the Swiss stock market over the next 30 years would be 4.1% without any climate change, but 5.4% with climate change. Over 30 years, the compounding effect of this difference is significant to a $10,000 investment. Without climate change, it would be worth $33,000 in 2050; with climate change it is $48,000.

While this may paint a positive picture of climate change in these countries, the devasting effects across the rest of the world should be encouragement enough not to stand still in playing our part. The opposite of the above is predicted in the markets of countries who already have the warmest temperatures, mainly emerging markets, as they will inevitably be hit hardest by climate change over the next 30 years.

Whereas annualised inflation-adjusted returns in Switzerland were positively affected by climate change, in India, for example, the forecast is 6.2% without climate change but a surprisingly low 2.3% per annum with climate change. This changes a $10,000 investment today from $60,000 to $20,000, reducing returns by two-thirds when climate change is factored in.

Other hard-hit markets identified were Singapore and Australia, while emerging markets as a whole also suffer reduced predicted returns.

While the findings are based on several assumptions and ranges around return numbers, they clearly illustrate the winners and losers of climate change from an investment perspective. Long term divergence in regional performance also means that managing the risks of climate change is vital when choosing where to invest.

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Past performance is not a guide to future performance and may not be repeated. Capital is at risk; investments and the income from them can fall as well as rise and investors may not get back the amounts originally invested.

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