Investors could lose if climate change risk is ignored
Investors face the prospect of significant losses by 2100 to their assets if they do not consider the risks associated with climate change and mitigate those risks now, Brian Gardner has warned.
The editor of a report published by the Economist Intelligence Unit, warned that investors faced a stark choice.
“Either they will experience impairments to their holdings in fossil-fuel companies should robust regulatory action on climate change take place, or they will face substantial losses across the entire portfolio of manageable assets should little mitigation be forthcoming,” he said.
The 60-page report, The Cost of Inaction: Recognising the Value at Risk from Climate Change, sponsored by Aviva Investors, called on asset managers and institutional investors to incorporate climate change into their risk management.
“For pension funds and the like, complete inaction in the face of climate risk is arguably a failure to act in the long-term interest of their beneficiaries,” the report stated.
According to the report, the current value at risk from climate change is $4.2trn (£2.7trn) which it pointed out was roughly the total value of the world’s publicly listed oil and gas companies or the entire GDP of Japan.
The report also found that the tail risks were more extreme, 6°C of warming could lead to present value losses worth $13.8trn (£8.9trn) and as climate change was global in scope and irreversible, lower growth and diminished prosperity would result.
Asset managers also faced significant challenges diversifying out of assets affected by climate change.
The effect on the value of future assets would stem not only from direct, physical harms but also from weaker growth and lower asset returns. This interconnection, the report contended, would reduce returns, even on investments unharmed by physical damage.
Two recommendations cited in the report included making it compulsory for companies to disclose their carbon emissions, in a standardised and comparable form and overseen by the regulators. Investors should also assess their climate-related risks and take steps to mitigate them.
Adviser View
Phil Cockrell, financial adviser at Norwich-based Investing Ethically, said: “There is a growing disinvestment process from oil and gas companies, with people looking to disinvest in high carbon industries plus we have seen strong growth in the renewables sector so there is strong movement towards ethical investing.
“We have clients who are increasingly looking to invest in clean energy and not invest in carbon-based investments, but it is difficult at to totally disengage from fossil fuels at present.”
