The world is changing at an unprecedented rate. This is having a profound impact on all aspects of our lives, including our investments. Evelyn Partners charity investment managers Emma Moffat and Luke Hunter discuss some of the key trends and risks that are shaping the world today and how investors can position themselves to benefit from these movements.
How do we define ‘rapidly changing world’?
Just a few years ago, the idea of self-driving cars was unimaginable. Robots were something from a science fiction film. Today, they are a reality. This rapid pace of change is being driven by several factors, including advances in technology, globalisation, market shifts and climate change. Two recent examples are the wildfires in California, which were arguably made worse by climate change, and the rapid developments in the field of artificial intelligence (AI), with the release of an innovative model by Chinese company DeepSeek.
To ensure that investments keep pace with this rapidly changing world, we need to be able to adapt to new trends and technologies. Something that would have been a core holding in your portfolio five years ago might be viewed differently today. We have experienced seismic changes in AI, significant developments in geopolitical tensions, and lived through a pandemic. These events, among many others, have a profound impact on the way businesses may operate moving forwards.
What are some of the investment concerns?
Looking specifically at the devastating California wildfires, it seems appropriate to focus on insurance. Warmer temperatures and drier conditions caused by climate change are fundamentally reshaping the industry and creating significant investment concerns. Insurers face greater financial risk from natural disasters such as higher claims payouts whereas the insured face potential premium hikes, and more worryingly, reduced availability of insurance.
So, how does one adapt to this change? Opportunities exist in companies that are proactively adapting to climate change, such as those investing in renewable energy or offering innovative climate-risk solutions. Insurers, for example, can mitigate risks by diversifying their investment portfolios, investing in climate-resilient infrastructure and developing innovative products that incentivise risk reduction.
Insurance companies aside, the wildfires were a clear reminder that there are increasing risks to business and the economy from climate change-driven environmental impacts, not least excessive heat, storms and flooding. These types of events will likely continue, and worsen. Therefore, evaluating the risks of environmental factors into your investments is becoming increasingly crucial.
What is the relationship between AI and climate change?
The unpleasant reality for technophiles is that AI uses loads of energy. Worldwide cloud data centre electricity consumption is expected to exceed 1,000 terawatt hours next year (International Energy Agency), over three times the entire UK electricity consumption in 2023 (gov.uk). It is impossible to know how much is directly attributable to artificial intelligence, but Goldman Sachs estimates AI will be 19% of demand by 2030, plus energy used for AI outside of data centres. This usage is meaningful in a world already struggling to achieve its renewable energy goals.
Additionally, a colossal volume of water is needed to cool the AI systems. This will exacerbate water crises.
Recent developments offer hope. The new kid on the block DeepSeek claims that its latest AI model is 50- 75% more energy efficient than leading US models. Chip designers and manufacturers, such as Nvidia and Taiwan Semiconductor, are constantly battling to improve their products’ energy efficiency. Helpfully, reducing energy usage and increasing profits are closely aligned.
The benefits of AI shouldn’t be overlooked. It can manage energy grids, predict and respond to disasters such as wildfires, and tackle challenges such as nuclear fusion. AI energy usage is concerning at first glance, but the overall impact could go either way. Hopefully, these factors are weighted to ensure the benefits outweigh the environmental cost.
How can investors navigate these changes/concerns?
Regardless of responsible investment beliefs, information and opinions change quickly, so portfolios need to be able to respond. Investments should be structured to be flexible and nimble enough to meet the aims of their owners as they develop. For example, the 2022 Russian invasion of Ukraine made some investors reassess their approach to investing in the defence sector in line with supporting the defence of Ukraine. Investors in the sector were largely rewarded.
Despite short-term factors, investors must think long term. For example, choosing to exclude rather than engage with high-emitting companies might have the unintended consequence of failing to support the corporate behaviour responsible investors wish to encourage. While some charity investors need to draw red lines under areas they believe should always be avoided, they can extensively engage with companies on other areas of concern before risking divestment.
In a rapidly changing world, you never know what might happen next. However, like a well-crafted boat, portfolios should be built to endure a long voyage but be adaptable enough to benefit from changing winds.
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