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PGIM’s Chief Operating Officer, Taimur Hyat, joined Barron’s Market Brief to discuss PGIM’s Megatrends research, Weathering Climate Change. During the interview, Hyat explores the risks climate changes pose to financial markets, as well as the potential opportunities for investors in the transition to a lower-carbon world.
>> My next guest has a crucial warning for Wall Street. Taimur Hyat helps oversee one and a half trillion dollars as Chief Operating Officer for PGIM, the global investment management business of Prudential. We discussed why essential focus within his firm now revolves around the impact of climate change. Take a look.
>> With just the series of climate disasters happening around us, I think most investors, not just ESG investors, now see climate risk and climate opportunities being priced in securities and assets. And that's why they need to care because it's going to move markets and change their investments regardless of their perspective of how climate change fits into their portfolio.
>> Regardless of it being priced in, PGIM found that nearly 90% of global investors believe that climate change is important but 40% still have not incorporated it into the investment process. So how big of a problem do we have here when the repricing happens?
>> So big variation by region. Europe is way ahead in terms of integrating climate change. Asia and US are catching up. But I think for those investors who don't catch up, it will be a problem. Because there've only been a few markets, carbon emissions, goal assets, you know, obvious stranded assets, obvious dinosaurs that have been priced in. But we do believe either through aggressive, abrupt Minsky Moment or perhaps with regulation such as some of the new regulation you're seeing under the Biden administration in the US there will be a gradual internalization of climate change into prices and you've got to start getting the data and changing the investment process to make sure you capture those effects.
>> Well speaking of Biden's new released two trillion-dollar infrastructure plan, how does that play into your forecast, to your confidence, and impact your investment strategy?
>> I think first of all, just more broadly, it adds to our thesis that climate change externalities will be priced into markets. You know, climate change is becoming more salient, you're seeing investors act, you're seeing consumers act, but you're now also seeing more governments act and I think the 100 billion on the vehicle, on the vehicle side, the 100 billion for climate resilience, all that additional government action means you've got to take it into account every time you price an asset, every time you see an opportunity. And I think this changing landscape that the Biden administration will create through particularly the climate change portion of their infrastructure investment, will actually be something every investor needs to take into account.
>> So talk to me about what sectors, industries could be most impacted by climate change both on the winning and the losing side.
>> Absolutely, Sy. I think one of the least understood pieces of climate change is how there will be obvious sectoral losers, in say, stranded industries, parts of coal, industries that haven't changed. But even big opportunities and differences from in-country lands. So countries like Canada, countries like Russia, northern Europe, will be far less impacted than countries like Brazil or India or Egypt where there'll be quite significant impact from the heat stress and water stress, feeding into declining labor productivity, feeding into declining agricultural productivity, feeding into declining GDP growth and therefore into the markets. And I think that means you need to be much more discerning, much more active, much better in terms of understanding these risks, particularly when you look at emerging market equities in debt but I think across the portfolio. And then the second piece is hidden risks. You know, we've got to move beyond looking at the obvious physical risks in fossil fuel assets although those are absolutely real. But also think about the hidden risks. And the best example is perhaps pharmaceuticals where, you know, you think of these pristine headquarters in Switzerland companies but you recognize that a lot of their manufacturing happens in places like India, which I just mentioned. And water is a key part of the production cycle and there will be extreme water scarcity, and how well diversified are these pharmaceutical companies in terms of their manufacturing? So there's a physical underpinning to many industries that we don't think of climate change roots and digging into that supply chain, understanding it will be increasingly critical.
>> Many thanks to Taimur Hyat.