As the 2024 U.S. election cycle takes shape, we are starting to see a rise in the volume and intensity around the climate change debate, specifically on three climate-related issues: anti-ESG backlash; the investment impact of climate events and pending SEC climate regulation.
Growing popularity also has brought growing political interest, as a series of U.S. state legislatures have introduced legislation to prohibit state entities from doing business with asset managers who have ESG funds and integrate ESG analysis into their investment process. This campaign has been met with mixed results but is probably not going away soon — or at least not before the 2024 election.
How can we assess potential investment risks posed by weather? Investment risks related to climate change are typically classified as physical risk and transition risk. Physical risk is damage to property, infrastructure and other real assets from events like flooding, wildfires and hurricanes. Transition risk is the financial impact on companies driven by competitive forces as the economy moves away from fossil fuels toward alternative energy sources.
How to make these decisions is not always obvious. For example, some traditionally carbon-intensive companies might actually stand to benefit from the fossil fuel transition due to strategic changes they are making to their business model, like a utility embracing renewable energy sources. Other companies or industries positioning themselves as forward-looking may actually be big carbon offenders.
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