Climate change is big news — both bad and good — for long-term investors

Climate change is big news — both bad and good — for long-term investors

The bad news? The longer your time horizon, the more climate change risk is compounding.

The good news? Effectively managing your exposure can add alpha and reduce risk.

Climate change is demonstrating its effects worldwide in the form of rising temperatures and shifting precipitation patterns. The result is more heat waves and droughts, more potent storms and rising sea levels. Unfortunately, these changes are our shared reality — and the longer an investor's time horizon, the greater the effect of climate change risk on the investment portfolio.

Risks arising from climate change extend across asset classes, industries and geographies — threatening businesses in three key areas:

· Physical damage: Land, buildings and infrastructure that are affected by heat, drought and flooding

· Increased liability: Financial liability (e.g., insurance claims) and legal damages (e.g., torts and negligence suits tied to climate-related risks)

· Reputational damage: Connected to activities that stakeholders might deem inconsistent with the climate change issue

Why should you consider ESG in your portfolio? We believe addressing climate change risk adds alpha while reducing risks and avoiding catastrophes — in every asset class that adopts a long-term view.

Public equities: Low-carbon companies outperform and avoid scandals

Public companies that successfully account for the impact of climate change have the potential to perform in line with or better than their peers: Since 2010, the MSCI Low Carbon Target Index modestly outperformed the MSCI ACWI. Looking ahead, climate-related risk is predicted to compound over time, meaning that climate-attuned portfolios have the potential to outperform amid tighter regulations, faster technological changes, or more frequent catastrophic weather events.

Companies that proactively manage their exposure to climate change risks demonstrate stronger governance and serve investor interests by mitigating costs that address wide-ranging climate impacts. For companies that have failed to adequately manage these risks, the repercussions have been severe. Their experience demonstrates the limitations of focusing too narrowly on traditional valuation models and ignoring other prisms for assessing management behavior.

Take, for example, carmaker Volkswagen's recent scandal. After admitting to cheating on auto emissions tests, they faced a recall of millions of vehicles, their CEO was forced to resign, and Audi's CEO was arrested. For several years, MSCI had already been flagging VW's declining governance scores based on a number of controversies. Volkswagen was dropped from the MSCI ACWI ESG Index in May 2015.

Exercising stronger corporate governance with a particular focus on ESG principles may have forestalled significant financial and reputational damage. Only by taking a forward look — beyond today's climate-related realities, to tomorrow's amplified possibilities — can CEOs, shareholders and investors effectively move beyond simply mitigating climate change risks to seize opportunities that our changing world may manifest.

Public fixed income: Despite energy policy shifts in Washington, the green bond market soars

While there has been a clear shift in domestic energy priorities, investor demand, favorable economics and bipartisan support of renewable energy would continue to drive the clean energy revolution.

The ongoing transition to renewable energy continues to provide investment opportunities that offer the potential to achieve a "double bottom line" of competitive financial returns along with direct and measurable environmental benefits. We continue to see growth in the category and offer examples around how our investment approach seeks to deliver on these dual goals.

For example, the labeled green bond market was $9.5 billion in market value in 2007. Today, it has grown to $452.9 billion — that's a 4,700 percent increase. And, the unlabeled climate-aligned bond universe is estimated at roughly three times the size of the labeled market.

Given growing investor demand and understanding of the impact potential within fixed income, as well as issuer interest in addressing climate change, we continue to see an expansion of investment opportunities that meet double bottom line objectives.

Real estate: Sustainability will fare better in the long run

Improving the sustainability performance of real estate improves the attractiveness of the asset, keeps service charges lower, and reduces operational costs for occupiers. The transition to the low-carbon economy is now recognized by the business community as a certainty. The questions to ask are about the pace of that change and who the winners and losers will be as we undergo this transformation.

Real estate represents roughly 40 percent of global carbon emissions, so it is a significant part of the current problem and also part of the potential solution. The emergence of the "net zero building" is continuing to be the next frontier of good real estate investments.

Net zero buildings are generally accepted to mean buildings that are highly energy efficient, with all remaining operational energy use from renewable energy. There is mounting evidence that these buildings are easier to sell, more attractive to tenants, and less vulnerable to obsolescence. It is evident that these buildings are good investments that will ensure the best returns and remain "future proof."

Real assets / natural resources: The threats and opportunities of climate change to farmland investments

We all need food to survive — and we have very advanced agriculture to generate this food. However, there are two major things happening that we can't ignore.

1. In 30 years, we'll have another two billion people to feed, so there is a greater demand for more agriculture.

2. Climate change is making it much harder to grow food when you have severe storms, floods, wildfires and droughts.

Nuveen is the No. 1 global farmland investor, and we're very focused on how climate change affects a farm's productivity and value over the long term. It's not about sacrificing near-term performance — it's really about preparing, at the same time, for performance in tomorrow's world.

Sustainability is critical to maintaining long-term value for shareholders, because a farm has to be cultivated, tended to and protected if it's going to keep producing food and material year after year. One key threat to agriculture — really, to everyone on the planet — is deforestation, which creates about 15 percent of CO2 emissions globally. Deforestation in tropical areas is a particular concern because every minute about 40 football fields of tropical trees vanish. That is why we're committed to discouraging deforestation through a Zero Deforestation Policy for our Brazilian farmland investments. We think a Zero Deforestation Policy will add long-term value for our agriculture investments.

We are long-term investors. Therefore, we are relentless in giving voice to the long-term per­spective — and it's critical to look at investments through the prism of climate change. We believe good ESG practices can add alpha and reduce risk — and create a better world.

This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell, or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor's objectives and circumstances and in consultation with his or her advisors.

Investing involves risk; principal loss is possible. There is no guarantee an investment's objectives will be achieved.

Nuveen provides investment advisory solutions through its investment specialists. 831907-R-O-04/20

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