Investors could be facing a significant re-pricing of some of the major blue chip stocks which dominate the largest equity funds, after Bank of England governor Mark Carney revealed to MPs it is undertaking a review into how tough new carbon emission targets could affect stability.
Mr Carney made the revelation in a letter to the Parliamentary Environmental Audit Committee in which he responded to questions on so-called ‘stranded assets’ or ‘stranded carbon’, buried desposits of coal, gas and oil which may be ‘unburnable’ as climate targets are to be met.
In the letter, which was published online by the committee on Sunday (30 November), Mr Carney references his earlier remarks during an address at the World Bank which warned a limit of 2 degrees celsius could preclude burning of swaths of the remaining identified fossil fuel reserves.
Ongoing climate change talks between world leaders in Peru, a precursor to a major summit in Paris next year, are expected to set a target of reducing carbon emissions dramatically to ensure temperatures do not rise by 2 degrees, which scientists believe represents a ‘tipping point’.
Mr Carney continues that since these remarks the topic of stranded assets has been discussed by the Bank in response to work being undertaken by the Department for Environmental, Food and Rural Affairs, and that further investigations will follow.
He writes: “In light of these discussions, we will be deepening and widening our inquiries into the topic, and I expect the Financial Policy Committee to also consider this issue as part of its regular horizon scanning work on financial stability risks.”
Speaking at an FTAdviser event last year on ethical investments, Overseas Development Institute chairman James Cameron sounded a stark warning over the way risk is being structurally and wildly mis-priced within a range of relatively mainstream investments due to climate change.
He claimed in particular that fossil fuel companies are not properly factoring in risks to their business model in the short, medium and longer-term and are fundamentally mis-priced. He also questioned the pricing of soft commodities due to the lack of a pricing benchmark for water.
“One day a prospectus is going to land that will say nothing about any of this and it is going to lose clients a lot of money,” he stated.
Joan Walley, chairwoman of the Environmental Audit Committee, told FTAdviser sister paper the Financial Times yesterday: “Policymakers and now central banks are waking up to the fact that much of the world’s oil, coal and gas will have to remain in the ground... it is time investors recognised this as well.”
ashley.wassall@ft.com
