The Connection Between Climate Change and Geopolitics
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 neighboring 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 neighboring 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.