Did you know that if all the ice in Antarctica melted, sea levels would rise by a massive 57 meters? Climate change isn't just a future worry – it's a global phenomenon that we can't ignore. It's not just about the environment either; it's affecting our economies, our ways of living, the way governments allocate resources via policy making, and how institutional and individual investors allocate their investments.

At the recent COP28 United Nations Climate Change Conference, countries around the world continued to brainstorm about how to deal with this pressing subject.

• The constant rise in global greenhouse gas emissions makes the effects of climate change more visible. This isn't just bad news for the planet's ecosystems – it's a real issue for our economic activities and social stability.
• Climate change is doing more than just harming the environment; it's changing the way the world's economy works and how investment shifts directions.
• There are investment opportunities in the market related to climate change. Investors can take advantage of these, but they need to be careful to balance the potential benefits with the risks associated.
• Investing in sustainable assets are expected to generate stable returns over time, but it shouldn't be pure focus of your investments. It's beneficial to consider putting them as part of a diversified portfolio investment strategy.

Current Trends in Climate Change

In recent years, the rise in global average temperatures has become an undeniable reality. According to reports from the World Meteorological Organization, the Earth's average temperature has risen by approximately 1.1°C compared to pre-industrial levels over the past few decades. This seemingly small increase has had profound effects on the global climate system. Extreme weather events like heatwaves, droughts, floods, and hurricanes have become more frequent and severe.

The increase in extreme climate events is a significant characteristic of global climate change. For instance, the accelerated melting of ice caps in the Arctic and Antarctic is causing sea levels to rise, posing a threat to coastal cities. Additionally, unprecedented high temperatures and droughts are being experienced around the world. These events are causing not just ecological destruction but also pose significant challenges to agricultural production, water supply, and human health.

Key Causes of Climate Change:

• Electricity Generation: The massive global emissions largely stem from electricity generation and heating through the burning of fossil fuels. The majority of electricity is still produced by burning coal, oil, or natural gas. This process releases greenhouse gases that envelop the Earth and absorb heat from the sun. Globally, only just over a quarter of electricity comes from renewable sources like wind and solar energy.
• Deforestation: Clearing forests for farms, ranches, or other reasons releases greenhouse gases, as trees release the carbon they have been storing when they are cut down. Approximately 12 million hectares of forest are destroyed annually. Forests play a crucial role in absorbing carbon dioxide, so their destruction also limits nature's ability to prevent carbon dioxide from being released into the atmosphere.
• Manufacturing Goods: Greenhouse gas emissions from the manufacturing and industrial sector mainly come from burning fossil fuels to provide energy for producing cement, steel, electronics, plastic products, clothing, and other goods. Mining and other industrial activities also release greenhouse gases, as does the construction industry.
• Animal Husbandry: According to the United Nations Food and Agriculture Organization (FAO), global livestock farming emits about 7.1 gigatonnes of carbon dioxide annually, accounting for approximately 14.5% of human-induced greenhouse gas emissions. Cattle are the largest contributors, accounting for 65% of emissions from the livestock sector.
• Transportation: Most cars, trucks, ships, and planes operate on fossil fuels, making transportation a major source of greenhouse gas emissions, particularly carbon dioxide.

Climate change is a global issue, but its impacts vary significantly across different regions. Developing countries, particularly those in tropical and equatorial regions, are more vulnerable to the effects of climate change. Additionally, small island nations and low-lying coastal areas face severe threats from rising sea levels. For instance, Venice in Italy, according to a report by the European Geosciences Union, could see sea levels rise by more than 1.80 meters by 2100 in the worst-case scenario, submerging most of the city's structures.

Direct or potential impacts include:

• Rising Temperatures: With increasing greenhouse gas concentrations, global surface temperatures are rising. The decade from 2011-2020 was the warmest on record. Each decade since the 1980s has been warmer than the previous one. Nearly all land areas are experiencing more frequent hot weather and heatwaves.
• Extreme Weather: In many regions, destructive storms are becoming stronger and more frequent. As temperatures rise, more evaporation leads to more extreme rainfall and floods, causing more destructive storms. Global warming exacerbates water scarcity in already dry regions and increases the risk of agricultural and ecological droughts.
• Warming Oceans and Rising Sea Levels: The oceans, which absorb most of the heat from global warming, have warmed at all depths over the past 20 years. Melting ice caps are contributing to rising sea levels, threatening coastal and island communities. Climate change poses risks to the survival of terrestrial and marine species.
• Food Scarcity: Climate change and frequent extreme weather events contribute to increasing global hunger and malnutrition. Fisheries, crops, and livestock could be damaged or yield less.

In summary, climate change is intimately linked to everyone, not only causing destruction to personal lives and the surrounding natural ecosystems but also posing challenges to economic activities and social stability.

The Relationship Between Climate Change and Investment

Climate change, as one of the most pressing issues facing the world today, is not only having a profound impact on natural ecosystems but is also constantly changing the dynamics of the global economy and investment markets. This impact includes direct hits on traditional sectors like energy, agriculture, and real estate, as well as indirect effects on financial markets and investment behaviours. According to a report by the World Economic Forum, climate change has been identified as one of the current economic risks by global economic leaders. The continuous increase in global greenhouse gas emissions and the frequency of extreme climate events are causing severe damage to the ecological environment and significant impacts on economic activities. For example, the 2019 wildfires in Australia caused about $4.5 billion in direct economic losses and had long-term negative effects on the country's tourism and agriculture sectors.

In this context, investors and asset managers are beginning to realize the potential risks associated with investment decisions that do not consider climate change factors. According to data from the Institute of International Finance (IIF), by the end of 2020, the global issuance of climate-related green bonds had reached $1 trillion, and the asset management scale of climate-themed investment funds had doubled in the past five years. This trend reflects the market's recognition of climate change risks and the gradual improvement of response strategies. Additionally, many countries and regions are promoting the development of a low-carbon economy through policy guidance and market mechanisms. For example, the European Commission has proposed the "European Green Deal," planning to achieve carbon neutrality by 2050 and investing heavily in technological innovation and infrastructure construction in related fields.

The impact of climate change on investments is complex and varied. On one hand, as carbon emission regulations become increasingly stringent and renewable energy technologies rapidly develop, traditional high-carbon industries such as oil and coal are facing growing operational pressures. The performance of companies in these industries on the stock market is increasingly questioned by investors. According to a Bloomberg New Energy Finance report, global investment in renewable energy reached $303 billion in 2020, while investments in the fossil fuel industry significantly declined during the same period. On the other hand, as the impact of climate change on economic activities becomes more pronounced, many traditional industries are seeking transformation to address climate risks and market changes. For example, many automobile manufacturers are accelerating the research, development, and production of electric and hybrid vehicles to meet increasingly strict emission standards and consumer demand for green products.

Moreover, climate change is prompting investors and asset managers to re-evaluate the criteria and standards for investment decisions. Environmental, Social, and Governance (ESG) investing has become a widely discussed topic in recent years. ESG investing considers not only a company's financial performance but also its environmental impact, social responsibility, and governance structure. This reflects the growing importance investors place on a company's capacity for sustainable development.

Opportunities and Risks in Climate Change

Addressing climate change is indeed urgent, and various organizations and governmental bodies have been actively promoting and signing various measures and environmental protection agreements in recent years. Notable examples include the Kyoto Protocol, the Paris Agreement, and the recent COP28. The pressing need to solve these environmental challenges means there are abundant opportunities. Astute investors have undoubtedly considered the issues related to environmental protection, the future prospects of industries in this field, and how to incorporate such assets into their investment portfolios.

As climate change remains a pressing issue, there are indeed investment opportunities in the market. With thousands of different stocks and bonds traded in the capital markets, investors need tools to make wise decisions regarding climate change, such as ESG standards or green bonds:

ESG Ratings: Issued by rating agencies, these ratings evaluate stocks and bonds based on environmental, social, and governance factors. Many ESG ratings include details on specific climate change factors, such as a company's greenhouse gas emissions.

Green Bonds: Issued by companies, governments, multilateral institutions, and banks, these bonds fund projects that help mitigate climate change or are beneficial to the environment, like building renewable energy or restoring forests.

However, risks often accompany opportunities. Generally, there are two types of risks associated with climate change. One is the "physical risk" brought about by the direct effects of climate change. For example, when a region suffers from severe flooding, it not only damages crop production but also causes significant losses in the real estate and insurance sectors, thereby affecting the value of related stocks and bonds. These direct impacts are reflected in investors' choices, leading them to prefer investments that are more climate-resilient or resistant.

The other risk is "transition risk," primarily reflected in structural adjustments made by governments and corporations to reduce carbon emissions. As governments around the world implement stricter environmental regulations and carbon emission standards, investors begin to reassess the investment value of high-carbon industries, such as traditional fossil fuel industries. This leads to capital flowing towards more environmentally friendly industries, such as renewable energy. The renewable energy industry, represented by solar and wind energy, attracts considerable investments due to its potential to combat climate change.

Despite some industries clearly moving towards rapid, low-cost decarbonization (like electricity and passenger cars), without further technological breakthroughs, other sectors will struggle to achieve the scale and speed of emission reductions needed, so there remains much uncertainty.

To reduce the damage to investment portfolios caused by these risks, while seizing opportunities, it is important to follow the principle of investment diversification. This involves allocating different categories of assets and performing internal hedging between portfolios to ensure that investments are as credit-worthy.

Conclusion

As climate change increasingly impacts the economy and society, investors need to pay close attention to its specific effects on different industries. This involves not only identifying the industries most affected by climate change but also understanding which industries can provide solutions or adapt to new market demands. For example, with the proposal and implementation of global emission reduction targets, industries like clean energy, energy-efficient building materials, and food security (including the biotech companies specializing in food technology) will have room for development. At the same time, green finance and sustainable investment are becoming increasingly important, providing investors with opportunities to support sustainable development. However, we do not recommend heavily investing in industries and enterprises related to climate change, but rather considering an appropriate allocation of such assets when building a portfolio.