This way you can invest smartly in an age of changing climate

The climate crisis creates a host of risks for investors and they need to use new tools to manage them wisely - in the world, and in Israel as well

This way you can invest smartly in an age of changing climate

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While staying at the Madrid climate conference last December, I attended an economic conference on the margins of the conference that dealt with risk management in the era of climate crisis. Most conference attendees represented investment companies, insurance companies and technology companies primarily from Europe and the United States, providing or buying services in this area. The message from the conference was clear: In the advanced financial world, which incorporates investment considerations and risk analysis, an understanding of the scientific side along with analytical tools is needed to provide a return that calculates the climate considerations inherent in it.

For example, Saudi oil company "Aramco", which was issued a month ago worth $ 1.7 trillion, is unlikely to enjoy high returns in the era of changing energy markets and transitioning into a renewable energy world. And it's not alone: ​​next to it is the gasoline and diesel-fueled automotive market, tourist markets and ski resorts that will be affected by climate change, and other additional markets.

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The sea rises, and with it the premium

A host of risks are facing investors when it comes to climate change. In fact, there are three different types of risk: physical risks from extreme weather events, corporate liability risk against liability, and risk of regulatory change in transition to a low-carbon economy.

Physical risks can range from harm to physical assets as a result of climate change, a decline in agricultural crops as a result of floods or long dry events and the value of commodity prices in the world of climate uncertainty. An example of this can be seen in Florida Mortgage Insurance Companies, which are already embracing higher premium prices for assets close to the seafront that could be hit as a result of sea level rise due to climate change. Another example can be seen in recent days in the country, where insurance companies will have to pay significant sums of money to their insurers as a result of the intense rainfall, which is expected to occur more frequently and intensely due to climate change.

Corporate liability risks, on the other hand, pertain to individuals or populations who will suffer climate change damage and seek compensation from those responsible. In principle, this risk can be attributed to pollutant companies or investment bodies that own factories that emit very large amounts of greenhouse gases and may find themselves being sued by the damaged entities. The international law firm Clyde & co found that in 2019 only about 1,200 cases were filed in 30 courts around the world dealing with direct climate change damages, including Australia, Brazil, Canada, Germany and more. Most of the claims were made between cities against gas companies that were asked to compensate for the climate and pollution damage they caused.

In addition, investors are exposing themselves to risks arising from regulatory changes. These risks are associated with the constant change in regulation as part of tackling climate change. Regulatory changes have the potential to reassess the nature of companies' operations and even their valuation. For example, companies that do not manage the climatic consequences of their operations may suffer from a decline in sales because of their end-customer demand and in this way be affected by the decline in company value. In this regard, there is a trend of more and more investors looking for "Impact Investments" as part of managing their portfolio and neglecting investments in polluting companies, leading to a decline in the share value of these companies.

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Insurance companies have already raised the premium in Florida's coastal areas (Photo: Image Bank GettyImages)

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The change in the global trend must also seep into Israel

Not surprisingly, there is an increase in the number of online service providers and platforms that allow financial institutions and asset managers to implement methodologies that purport to include climate change risks within the investment decision-making process. The companies that specialize in these risk analysis include mainly American and European companies such as Moddy's, S&P and German DWS.

In Israel, these tools are rarely implemented in large corporations and are not a significant factor in making decisions in financial entities or asset management companies. The reasons for this can be varied: for example, lack of awareness and lack of demand on the part of Israeli investors to implement these analytical tools as part of risk management. Another factor is that Israeli regulation focuses on meeting environmental targets of pollutant emissions into the air and wastewater treatment, and less on the extent of greenhouse gas emissions into the atmosphere and their impact on climate change. Finally, the very fact that most institutional investment is directed to the knowledge-intensive industry (although knowledge-intensive companies also have a significant carbon footprint in electricity consumption and global consumer habits).

The change in the global trend must also seep into Israeli financial institutions. Increasing public awareness and demand from investors will require the use of these tools and will be a significant factor in making business decisions in Israel as well.

Dr. Avi Lubczyk is VP of Business Development at Capital Nature Venture Fund and specializes in investment and risk analysis in energy and sustainability