Investors need to understand how the climate agreement will affect their investment decisions, argues Mike Fox
With the ink barely dry on the climate change agreement signed in Paris, it is already time for investors to begin understanding how this changes their investment portfolios.
The commitment to limit the rise in global temperatures to "well below" 2°C above pre-industrial levels has been estimated by the International Energy Agency (IEA) to require $16.5trn of investment by 2030.
This commitment has the potential to negatively impact a number of industries many investors are exposed to. So what are the implications of Paris and how should investors respond?
As the famous saying about technology goes, in the short-term its impact is overestimated, in long-term underestimated. This sums up the impact of Paris on the oil industry.
In the short-term oil and its derivatives will remain the world's key energy source but if the majority of future energy investment goes into technologies designed to marginalise it, how can this be good for the oil industry?
The oil industry remains a key component of many investment benchmarks, and index-orientated investors may, in the coming years, find key parts of their portfolios impaired as the world invests in a lower-carbon future.
No company will be immune
Historically, efforts on climate change have largely been centred on the oil and power generation industries. For the Paris agreement to be implemented, all industries and companies will need to play a role.
Indeed, Unilever, one of the world's largest consumer goods companies, has already committed to using only renewable energy by 2030 and stopping using energy from coal by 2020.
As governments seek to implement the Paris agreement, it is likely the penalties for poor environmental practices will only increase and companies will have to adjust to making climate change a core principle in how they set strategy.
Investors may have to pay a premium for those companies showing leadership in environmental management as they are likely to be more profitable.
The $16.5trn estimated to be needed by the IEA will provide a huge source of funding for innovation to occur in the climate change economy. Innovative companies providing products and services with lower carbon intensity may well become as important as those companies created in the early stages of the internet.
Watch out for next Google and Amazon
Watch out for the next Google and Amazon but this time in the area of energy efficiency, clean energy or energy storage. The climate change economy could become as important and as powerful as the internet economy.
The internet revolutionised – in both a positive and negative way – many industries, and investors would be wise to consider what the impact could be if Paris has a similar effect.
Those investors exposed to oil and carbon-intensive industries, particularly index-orientated investors, have a material risk to consider.
Those companies that do not place climate change at the heart of their business strategy may well expose themselves to emerging risks. New industries will be created and innovation will flourish.
The impact of events in Paris will be with us for decades to come.
Mike Fox is head of sustainable funds at Royal London Asset Management