Private sector allies in the fight against climate change
As many of you know, Woodwell Climate Research Center (formerly Woods Hole Research Center) recently entered into a research initiative with Wellington Management, a prominent Boston investment firm, to investigate and highlight how physical climate risk (extreme weather, etc.) affects asset values and capital markets.
This is part of a broader strategy at Woodwell Climate of recruiting groups from across the political spectrum and representing all sectors of society (government, NGO, faith groups, and the private sector) into the fight against climate change. This is founded on the premise that to succeed in conquering climate change we’ll need everyone pulling in the same direction.
I am excited about our work with Wellington specifically because it is a new and important pathway to achieving societal benefit. In particular, Woodwell Climate sees huge upside from raising awareness of physical climate risk within the investment industry. We expect that this will prompt a significant reallocation of capital when investors realize that assets have been mispriced because of previous failure to consider climate risk. The beginnings of this are evident, for example, in studies showing that at-risk coastal real estate in Florida is appreciating more slowly than other comparable properties. This reallocation of capital will happen sooner or later, but the societal benefits will be greater if it happens sooner.
Beyond addressing mispricing, we expect our work with Wellington to promote climate action and preparedness in the financial industry and in the broader corporate world, through Wellington’s investors asking companies about their practices in these areas. When an investor or potential investor raises an issue, it is often assessed or addressed. Though our efforts to provide better climate data to investors, they will be increasingly better equipped to offer insightful and pointed questions.
In addition, one of the world’s largest asset managers, Blackrock International, followed our announcement by recently announcing its own effort to assess physical climate risk. So the potential for climate science work to add value in an asset management context appears to be gaining momentum.
Finally, the investment industry has a powerful political voice. If they understand the risks of climate change better, they are likely to use that voice to good effect.
Much of this is documented in a recent New York Times article: Climate Change Funds Profit Global Warming
Unfortunately, the article’s headline emphasizes the potential to increase profits through consideration of climate risk. While this is indeed possible, from the point of view of Woodwell Climate it is incidental to the broader societal benefits outlined above. It also seems likely that the downside potential from climate risk exceeds the profit-making potential. Despite the less than ideal headline, the article is nonetheless helpful by making the point that physical climate risk is affecting asset values now, and should be better reflected in the prices of those assets. That’s an important message because it is often argued that climate change “is too far away” to be relevant on the short time horizons investors care about. If only that were true!
Thanks for your support as we seek to bring new allies into the fight against climate change.