It is often said that climate change is a future risk, but increasingly, it is a present reality. And while environmentalists have long warned of this, it’s now the economy that’s beginning to raise its hand in protest. 2024 was officially the hottest year on record, with global temperatures averaging 1.55°C above pre-industrial levels. This marked the first calendar year to exceed the critical 1.5°C threshold set by the Paris Agreement. This threshold is not arbitrary, rather it’s considered a critical point beyond which the consequences of climate change become notably more difficult to manage for both human society and ecosystems. The World Meteorological Organisation (WMO) now forecasts that global temperatures could temporarily approach or in fact exceed 2°C above pre-industrial levels within the next five years.
While the 2024 average is a 1.55°C rise, this masks significant regional variations such as in Europe, which is experiencing warming at approximately twice the global average. The continent is already forecasting their potential damage from subsidence, a slow-moving disaster for homes and other structures caused by climate induced sinking land, at a potential $2.9 trillion. With this summer set to be one of the hottest and driest on record, billions in damages are a very real threat. From supply chains to pricing pressures, climate-linked disruptions are becoming impossible to ignore. Factories potentially lost to wildfires, harvests ruined by drought, supply chains paralysed by flooding, these are no longer tail risks but increasingly the reality in climate-sensitive regions. And when operations are halted and insurance premiums rise, the cost is borne by shareholders just as much as communities. Therefore, the sustainability transition is becoming an investment imperative.
There are clear signals of how climate change is already hitting our pockets, with the most visible stemming from commodity prices. We have witnessed an unrelenting upward drift in the price of staples like cocoa and rice. Or you may well have noticed the spike in olive oil prices last year. Or perhaps, the price of your coffee, after coffee beans saw a 103% increase in the 12 months to January. All instances have been directly linked to increased climate volatility which is reducing crop yields. Speaking of which, you may have noticed just how challenging recent weather patterns are making Jeremy, Caleb and Gerald’s life on Clarkson’s Farm. Sadly, it is unlikely to get any easier for farmers after England and Wales just recorded their driest spring since 1983. Moving forward, it is likely this type of news becomes rather commonplace, as we see a systemic move to higher climate volatility. If you aren’t yet convinced, I regret to inform that the number of extremely hot days per year has actually doubled since 1980. While in the US the average length of heat waves has tripled since the 1960s. However, you’ll note I speak to climate volatility rather than just warming. Exemplified on one October day in Valencia which saw more rain than in the prior three years put together.
Within my world I see a signal of concern coming from the insurance sector. Insurance companies often rely on the reinsurance market, which effectively insures insurers, to offload a portion of the risks carried on their balance sheets. However, the rising frequency and severity of catastrophic climate events, such as the LA wildfires, have made reinsurance coverage increasingly expensive, especially for large-scale disasters that could result in substantial losses. As a result, they have sought alternative coverage via ‘Catastrophe Bonds’. These are instruments which allow insurers to transfer risk to investors, effectively outsourcing some of the financial risk of natural disasters. In 2024, catastrophe bond issuance reached a record high of $17.7 billion, with the total market growing to $49.5 billion, and climbing.
Whether you have indeed noticed a worrying trend or perhaps the above is somewhat eye-opening, there is no denying that this is more than just a headwind for consumers; it is a systemic risk, embedding itself into inflation data and policy reactions. The question for investors is no longer “Will climate change affect the economy?” It’s “Which parts of the economy are already adapting, and which are not?”
This is where ESG, stripped of political dressing and jargon, comes into its own. Environmental, Social, and Governance analysis is not about ideology, it is about resilience. It is, in our view, one of the clearest frameworks available for identifying companies best positioned to navigate a world being remade by physical and systemic change. Environmental awareness (E) is no longer a virtue; it’s swiftly becoming a necessity. Social awareness (S) sits alongside this but rather acknowledges the ever-shifting shape of our societies. Before you underestimate how quickly our lives are changing, remember no one had heard of ChatGPT, let alone used it less than three years ago. Now it serves millions as a research tool, assistant, and even confidant. The last piece of the puzzle sits with good governance (G) which is simply synonymous with quality business and management. These are not idealistic aims. They are strong indicators of which businesses are most likely to deliver sustainable returns in a world defined by uncertainty. Those are the businesses we look for.
Through TAM’s Sustainable World portfolios, capital is allocated to companies evidenced as driving, or adapting to, the transition we are witnessing before our eyes. We avoid those least resilient, while providing capital to those working to weather the upcoming storm. With the effects of climate change here to stay, we see a plethora of opportunities for capital appreciation as the world gets to grips with this reality. There is currently no premium on companies who are resilient to the dramatic effects of climate volatility, be it through insulated supply chains or progress to net zero. There is also no premium on those companies actually providing the solutions to decarbonisation, we own those we believe to be the winners in this race. We hold commodities, not only those seeing price increases from climate volatility but also those needed to deliver clean energy infrastructure. We invest for positive impact in this space but only when we see a short, mid and long-term view to delivering financial returns. Consequently, we have direct exposure to water infrastructure and waste management. Both themes are essential services whose demand profile not only rise when climate stress intensifies but remains during economic stress. With the chance of a US recession not priced in, in our view, these critical functions of our society provide attractive upside potential as well as resilience in economic downturns. Further, we allocate to best in class precious metals strategies, particularly gold and silver, whose role in providing shelter during geopolitical turbulence has shone, returning 27% and 14% (FE) respectively in 2025 alone.
At TAM, our Sustainable World portfolios are designed to offer a solution for the investor who has noticed these shifts and wants their portfolio to reflect this new reality. The assets we look for carry significant weight when stability is in question – a situation we increasingly seem to find ourselves in. The world is changing; we think investments should too.
If you would like to have a chat about anything in this post, or to learn more about our TAM Sustainable World portfolios, please get in touch.