Quick Thoughts: The Connection Between Climate Change and Geopolitics

by Stephen H. Dover, CFA, Franklin Templeton Investments

Successful international investing includes measuring financial risks and rewards caused by events in an affected country. Stephen Dover, Head of Franklin Templeton Investment Institute, discusses how macroeconomic and political research complemented by environmental, social and governance (ESG) research provides investors additional prisms to view a country’s financials, impacts on climate change, and geopolitical risk.

International investments offer portfolio diversification potentially from exposure to countries outside the US. Successful investing includes measuring financial risks and rewards caused by events in an affected country. Today, macroeconomic and political research, complemented by environmental, social and governance (ESG) research provide investors additional prisms to view a country’s traditional financials and impacts on climate change.

  • Climate change is a systemic risk that affects investments and cannot be hedged. The ripple effects of climate change events spread beyond cities, countries, and into neighbouring countries with geographic, climate, or economic linkages.
  • Most investors and lenders react by incorporating relevant signals in their risk assessment models. This may not be enough, as climate change and geopolitics are often interdependent.
  • Climate change acts as a powerful force multiplier of geopolitical risk. Accelerated by population growth and declining water resources, climate change can drive rapid and radical structural changes in affected countries’ economies and demographics.
  • Specifically, water rights, access, management, climate change effects, and other water risks are drivers of geopolitical conflicts in areas where river basins lie across national borders. There is an increasing unreliability of fresh water supplies where many risks and factors coalesce, amplifying increasing water risk.
  • Two of the three most exposed river basins in the world are in India—the Indus River and the Ganges-Brahmaputra River. They are experiencing population growth, disrupted weather patterns, and increasing pressure on water resources, threatening the sustainability of agricultural yields and potential social unrest. These factors combine to drive existing geopolitical tensions with neighbouring countries higher.
  • The Danube River crosses nine European Union (EU) member countries and five non-members. Tensions exist between EU members and non-members on a variety of issues, including economic aid and potential accession to EU membership.

Read more on this topic in Franklin Templeton Investment Institute’s The Nexus Between Climate Change & Geopolitics. We examine two relatively underappreciated waves—geopolitics and climate change—to demonstrate the interdependencies between them and identify flashpoints that should be monitored.

 

 

 

What Are the Risks?

All investments involve risks, including the possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested.

Special risks are associated with investing in foreign securities, including risks associated with political and economic developments, trading practices, availability of information, limited markets and currency exchange rate fluctuations and policies; investments in emerging markets involve heightened risks related to the same factors.

Actively managed strategies could experience losses if the investment manager’s judgment about markets, interest rates or the attractiveness, relative values, liquidity or potential appreciation of particular investments made for a portfolio, proves to be incorrect. There can be no guarantee that an investment manager’s investment techniques or decisions will produce the desired results.

Diversification does not guarantee profit or protect against risk of loss.

Important Legal Information

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realised. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data.  Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

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