Reflections from Nepal: Climate risk, resilience and the role of investors

Last week, devastating floods tore through the Nepal-Tibet region, killing more than 1,200 people and leaving over 5000 still missing.¹ The disaster was triggered by the collapse of a high-altitude glacier, unleashing a torrent of mud and water that swept through nearby communities, leaving destruction in its wake and many with no means of escape.

Scientists are still investigating the precise causes of the glacier's collapse, but it is likely that several factors contributed to the disaster. As the planet warms, permafrost in the Himalayas is thawing, destabilising the foundations on which glaciers sit.² Air pollution, exacerbated by Nepal’s proximity to some of South Asia’s pollutive industrial centres, may also have played a role, with particles from coal-fired power stations and vehicle emissions settling on glacier surfaces, reducing their reflectivity and causing them to absorb more heat from the sun.³ The flood also occurred without the heavy rainfall that would typically signal an elevated flood risk, as locals were used to during monsoon season, leaving communities with little warning and limited time to prepare or evacuate.

Disasters like this serve as a timely reminder that climate-related disruption is becoming more frequent and more severe. As Simon Stiell, Executive Secretary of the UN Framework Convention on Climate Change, recently noted, scientists and local communities have long warned that the Himalayas face growing risks from climate change, and that “a warming climate […] is making tragedies like this one […] much more likely, frequent and severe”.⁴

The costs of climate change: human, environmental and economic

The human cost of events such as those seen in Nepal is immeasurable, with climate-related disasters often affecting the most vulnerable communities. As sustainable investors, we consider climate change through its environmental and social consequences, and also its financial implications, particularly its economic consequences for business, both directly and indirectly. The same physical risks that threaten communities and ecosystems also disrupt economic activity, damaging critical assets and infrastructure, disrupting operations and supply chains, and undermining business resilience and continuity.

These risks are becoming increasingly material, affecting profitability and long-term shareholder value. Our responsibility is to understand how exposed the businesses we invest in are to climate-related risks, and whether they are taking appropriate steps to build resilience.

These dimensions are ultimately interconnected. Financial markets do not exist in a vacuum: long-term investment returns depend upon healthy societies, functioning economies and stable natural systems. Understanding how climate change threatens these foundations is therefore essential not only to recognising the wider human and environmental consequences of a changing climate, but also to growing and safeguarding long-term value for our clients.

Climate adaptation and resilience is an increasingly important area for us as sustainable investors

Recent events such as those in Nepal underline that climate risks are already affecting communities and economies around the world. As these climate-related hazards become more frequent and severe, strengthening resilience and adapting to the changing climate are becoming increasingly important for businesses and investors alike.

We believe investors have a responsibility to understand whether companies are recognising the growing reality of physical climate risk and strengthening their resilience accordingly. These impacts are already material, whether it be supermarket retailers experiencing operational disruption during heatwaves, or utilities incurring significant costs from weather-related asset damage – these impacts are real. This requires looking beyond short-term financial performance to assess whether a business is prepared for the environmental and operational challenges ahead.

How we respond at EdenTree

At EdenTree, we seek to address climate risk through both investment selection and stewardship.

Investment selection

Before investing, we assess whether companies understand and are appropriately managing their climate-related risks. This includes evaluating how exposed they are to physical climate hazards and whether management teams understand asset or supply-chain risk exposure. We also consider companies’ approaches to climate mitigation – how they are reducing their emissions, what targets they have in place and the quality of their climate transition plans to ultimately decarbonise over time.

We believe businesses that effectively manage climate risks are likely to be better positioned to navigate future disruption, maintain operability and cashflow, and return sustainable long-term value.

Stewardship and engagement

Identifying risks is only part of the equation. We also use our influence as shareholders to encourage companies to plan for those risks and strengthen their resilience through targeted engagement.

Through regular and constructive dialogue with company management, we encourage better decision-making on climate strategy, governance and risk management. This includes engaging companies on both climate mitigation and adaptation: encouraging them to reduce emissions and support the transition to a lower-carbon economy, while also preparing for the physical realities of a changing, more unpredictable climate. This stewardship requires accountability. We assess whether companies are making meaningful progress against their plans and targets and engage where improvement is needed. Through our proprietary Climate Stewardship Plan, we subject our highest 20 emitters to enhanced climate monitoring and engagement, ensuring we focus our efforts on our most carbon-intensive companies.

Addressing climate-related risks requires ongoing scrutiny, long-term commitment and a willingness to challenge and escalate our concerns with companies when actions fall short of our expectations. Where others are stepping back, we remain firmly committed to stewardship as a core part of our investment approach, and we will not step back from engaging on important issues simply because they are difficult or contested. We believe this is a fundamental part of managing long-term risks and opportunities on behalf of our clients. Our belief in the power of stewardship to protect and enhance long-term value, while addressing pressing global challenges, has only strengthened.

A reminder of what is at stake

The floods in Nepal are a stark reminder that climate change is a material environmental, social and economic challenge. While investors alone cannot prevent tragedies such as these, we undoubtedly play an important role in addressing the risks that underpin them. By allocating capital responsibly, encouraging companies to reduce their emissions and supporting investments that strengthen resilience, investors can contribute to both climate mitigation and climate adaptation. In doing so, we can help companies prepare for the challenges ahead while protecting long-term value for our clients.

Disclaimer

This document has been prepared by EdenTree Investment Management Limited and has been produced for information purposes only and as such the views contained herein are not to be taken as advice or recommendation to buy or sell any investment or interest thereto. These are the views of the author at the time of publication and may differ from the views of other individuals/teams at EdenTree Investment Management.

This marketing communication is issued by EdenTree Investment Management Limited (EdenTree) Reg. No. 2519319. Registered in England at Benefact House, 2000, Pioneer Avenue, Gloucester Business Park, Brockworth, Gloucester, GL3 4AW, United Kingdom. EdenTree is authorised and regulated by the Financial Conduct Authority and is a member of the Investment Association.

Firm Reference Number 527473.