Wellington’s Climate Research Team works with Woodwell Climate Research Center to integrate climate science into the investment process for our impact strategies. We increasingly leverage reports, quantitative models, and investor tools to identify impact assets with exposure to these risks and companies whose products we believe minimize the human and environmental toll of climate-related events.
One key climate-related trend that overlaps with impact investing — particularly our clean water and sanitation theme — is water scarcity. We believe chronic water shortages in many regions are a critical issue. Solutions to prevent or alleviate water scarcity will likely attract more investor attention and trigger significant capital spending as governments and public/private partnerships invest in water infrastructure and technology. And because water scarcity is still underappreciated by the market, impact investors have opportunities to uncover attractive investment opportunities.
For example, a company we have researched facilitates water reuse and recycling, among other services, and has the potential to build a utility-like business providing outsourced water-management services for institutional customers like hospitals and industrials. In this way, we find the company’s social value and impact potential as attractive as its differentiated business model.
Mapping climate risks
Wellington’s research collaboration with Woodwell has produced an innovative geospatial mapping tool that overlays physical climate-risk variables, including heat, hurricanes, flooding, drought, water scarcity, and sea-level rise, onto global maps that can display the locations of investable assets. This tool has helped us analyze how and where climate change could affect companies and issuers in the impact investing universe.
In a drought-prone region in Latin America, for instance, a water sanitation company tracks regional water availability and implements measures intended to guarantee continuous water production. By bringing our team’s physical climate data into the conversation, we were better able to assess the scale of local drought risk and the company’s near- and medium-term risk-mitigation capabilities. We have also used the mapping tool to assess risks to mortgage-backed securities supported by apartment buildings in the affordable housing theme. If a building is located in a coastal area at risk of flooding from hurricanes or sea-level rise, we may choose to avoid the related bonds.
How chronic climate risk affects our outlook
In the education and job training theme, we have identified a company that matches employers with job seekers. In early 2020, data indicated a sharp drop in job postings and employer-match activity, revealing that the devastating bushfires had had a material negative effect on business. Wellington’s climate research projects that Australia, which experienced devastating wildfires in late 2019 and 2020, will continue to grapple with active wildfire conditions. We have integrated this input into our research mosaic for impact companies we consider in Australia.
Finally, our Climate Research Team projects increasing heat and drought conditions for many parts of Asia. Our digital divide theme looks at companies that produce chipsets for the sale of low-cost mobile devices and handsets. The average semiconductor plant consumes between two and four million gallons of water per day.1 Recent drought conditions in Taiwan exacerbated existing market tightness for semiconductor production, boosting some companies’ pricing power, but chronic exposure to potential drought could be a challenge in the long run. Here again, climate data and research will inform our thinking about a region and industry critical to our impact approach.
The Climate Research Team’s research has helped us gain conviction in investments in several impact themes, and it is beginning to inform our analysis in sustainable agriculture and nutrition, health, and resource efficiency. The guidance they provide often informs our fundamental company and issuer analysis and enhances valuation assessments. As society adapts to climate change, we believe Wellington and Woodwell’s climate research will become integral to our impact research, helping us identify new investment ideas and make more nuanced industry-level assessments.
Please learn more about impact investing and explore our 2020 impact activity and outcomes.
1“Waste Not, Want Not – Water Use in the Semiconductor Industry,” Sustainalytics, March 2017. While more current data is unavailable from this source, the investment team believes this trend persists today.