Dallas Fed sees economic impact from climate change; Calvert applauds

August 23, 2019 — In this Q&A, the Eaton Vance floating-rate loan team offers its perspective on today’s loan market.

By: Craig P. Russ; Andrew Sveen, CFA; Ralph Hinckley, CFA; Christopher Remington

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By John StreurPresident and CEO, Calvert Research and Management

WASHINGTON -Responsible Investing has moved far beyond the outdated reputation as a niche investment area. The risks, needs and opportunities presented by issues like climate change affect everyone and have impacts across industries and throughout the political and social spectrum. As that becomes clearer, everyone - governments and government agencies, the private sector, asset managers, investors and society writ large - has to consider how everything they value may be impacted by climate change.

At Calvert, our proprietary research seeks to quantify the risk exposures and management capacity to deal with environmental and societal risks and impacts at individual companies. We know that the relevance of these risks is increasing in terms of the financial impact to companies, and their ability to adapt to and mitigate risk is a critical determinant of their ability to thrive in the long term.

Increasingly, other participants in the financial system recognize this as well, even in parts of the country that traditionally are associated with industries like fossil fuels. A powerful example of this occurred in Texas, through a communication from the Federal Reserve Bank of Dallas (Dallas Fed) earlier this week. Dallas Fed President and CEO Robert S. Kaplan proactively brought up the topic of climate change, and its impact on the Eleventh District, which covers Texas, northern Louisiana and southern New Mexico.

Climate change's emerging impact

Kaplan reports that the substantial human and economic costs that severe weather events can present have become an increasingly common topic of consideration in the Eleventh District, thanks in part to Hurricane Harvey. The storm caused approximately $74 billion in property damage and lost output when it hit Texas in August 2017. 1

Almost two years later, the impact of Hurricane Harvey continues to be felt in the displacement of communities, ongoing rebuilding efforts, increased insurance costs, public spending on mitigation efforts, and more stringent building codes. Moreover, Kaplan notes low-income families were disproportionately affected, given twin impacts of lost savings and an increased need for housing, health care and related services.

Because of this, many are questioning how worried the region needs to be about severe weather events. With the latest National Climate Assessment projecting that the severity and damage caused by extreme weather events are likely to intensify in the years ahead, this concern is hard to ignore.

Adaptation and mitigation efforts in the Eleventh District

Rather than ignoring the increasingly obvious existence of climate change or hoping it can be prevented, global efforts are increasingly turning to adaptation and mitigation strategies. The Eleventh District is no exception. Kaplan reports that state and local leaders are studying various infrastructure investments that might upgrade the viability of neighborhoods, protect at-risk populations and businesses, and maintain the energy services value chain in the event of another severe weather-related disruption.

Moreover, Texas is looking beyond oil, as businesses invest much more heavily in alternative energy projects and sustainability initiatives. Energy companies are increasingly taking action to moderate the environmental impacts of shale oil production. Some energy companies and private equity firms are actively investing in battery storage and wind and solar projects - indeed, Texas is now the largest wind-energy-producing state in the nation.2 In addition, many companies are adopting greenhouse gas emissions targets and making investments to reduce their carbon footprints.

Continual importance of Responsible Investing

Texas might not seem to be an area where a Responsible Investing approach would be attractive to investors, given the importance of oil in the local economy. Indeed, as I speak to audiences about Responsible Investing, I often hear the assumption that this will be a tough sell in Texas, with the assumption that the state is so pro-oil that it will not be receptive to an environmental, social and governance (ESG) approach that is perceived to be hostile to fossil fuels.

However, as Kaplan says, "As a central banker, I do not delve into the political and other controversial aspects of this subject. However, I do intently focus on the ways severe weather events and climate-related trends are likely impacting economic conditions and financial stability in the Eleventh District and the nation."3 In doing so, he illustrated how sustainability is happening across industries and across regions, and why a high-impact region like Texas may have even more of a need than others to consider its potential impacts. Calvert applauds Kaplan and the Dallas Fed for incorporating the potential economic impacts from climate change into their analysis, and hopes others will follow their example.

Bottom line: The entire system is changing rapidly thanks to the increasingly obvious need to consider the likely impacts of climate change on businesses across the globe and across industries. The relevance of environmental and social impacts is increasing in terms of the financial impact to companies, communities and industries; the comments from the Dallas Fed illustrate the importance of factoring these risks and exposures into economic and business analysis.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.