Summer 2023 has brought the global effects of rising temperatures into focus. Forest fires from Rhodes to Maui and record-breaking global temperatures have led news headlines in July and August.
While climate change may not be directly to blame for the fires in Hawaii and elsewhere, rising global temperatures and droughts appear to make the situation worse. Looking to the future, this seems to be a pattern and global temperatures have been consistently rising in recent years.
According to scientists at NASA, July was the hottest month they had ever recorded and their records date back to 1880. July was 0.24 degrees hotter than any other July temperature recorded, and it was more than 1.1 degrees warmer than the average July temperature between 1950-1980.
Parts of Northern Africa, North America, South America, and the Antarctic Peninsula were particularly hot, and recorded July temperatures that were some four degrees above average.
How to quantify the economic effects of climate change
Effects of climate change are broader than just meteorological mutations. If warmer temperatures are here to stay, then investors need to consider what this means for their investments and portfolios and the effect on global economies.
The Reserve Bank of San Francisco have tried to quantify the economic effects of climate change. They found that rising temperatures have a short-term effect on productivity and output growth (GDP growth).
Using data from 155 countries to project growth in the future, they found that rising temperatures could reduce global output per person by 3.4% by 2100.
This is a significant dent in global output; however, this forecast assumes that the effects of rising temperatures will be temporary, i.e., at some point temperatures will return to the mean. But if tweaked, the permanent increases in global temperatures could reduce global output per person by a whopping 10% by 2100.
In the analysis, the impact of temperature increases on productivity is forecast to be three times as bad if it’s permanent, rather than temporary.
This is why it is important that more analysis is done by trained climate scientists when it comes to the impact of climate change on the economy. However, it is clear that if temperatures continue to rise then economic growth will be impacted.
Climate change and the unequal effects on global growth
The Federal Reserve Bank of San Francisco has found that the optimal temperature for productivity growth is 13 degrees. The average temperature in the US is 13.5 degrees, which while within the optimal range, in July, the average global temperature was 17 degrees.
It is worth noting that the economic effects will not be equal across countries. For example, a one-degree temperature change in a cold country can boost productivity to the tune of 0.7%, according to the San Francisco Fed, but, a one degree increase in an already hot country can significantly reduce productivity.
It's worth noting that the San Francisco Fed only looked at the effects of rising temperatures when it conducted its analysis. It did not adjust its projections for the economic impacts of rising sea levels, a loss of biodiversity, or natural disasters. However, rising temperatures may potentially have a large and varied impact on the global economy.
How investing can change your carbon footprint
According to research from Nest Pensions, the workplace pension scheme, in future, London could see summers with temperatures above 48 degrees. Also, for every single degree increase in the earth’s temperature, crop production decreases by 15%.
When climate change is quantified, it is no wonder that it is becoming an important topic for financial markets and investing. In recent years, investors have started questioning the carbon impact of their investment choices. As it turns out, new analysis suggests that your investment decisions could be the most effective way to reduce your carbon footprint.
Research commissioned by Aviva and Make My Money Matter, calculated the greenhouse gas emissions per £1 invested in a pension fund with exposure to a broad global equity fund vs. the greenhouse gas emissions per £1 invested in an equity focussed sustainable pension fund. It found that the sustainable pension fund produced a saving of 0.64kg of emissions per £1 invested.
The average pension pot in the UK is worth £30,000. So, the total carbon savings from an individual's average sized pension could be 19 tonnes if they switched to a sustainable equity fund from a global equity fund.
Since the average UK person’s carbon footprint is more than 7 tonnes, your investment choices could be the best way to help the environment.
Surprisingly, the same research found that moving to a sustainable equity-based pension fund is 21 times more effective than the combined annual emission savings of switching to a renewable electricity provider, adopting a vegetarian diet, and swapping air travel for rail travel.
Sustainable investing is still in its relative infancy and as it grows and becomes more popular it is facing more scrutiny and regulatory barriers. But, if sustainable investing is executed correctly, it could have a large impact on the environment, and the future outlook for the economy.
This article isn’t personal advice. If you’re not sure whether a course of action is right for you, ask for financial advice. Sustainability is just one factor to consider when choosing investments, all investments can fall as well as rise in value, so you could get back less than you invest.
Kathleen Brooks is the Founder of Minerva Analysis, a market analysis company. Hargreaves Lansdown may not share the views of the author.
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