Investors could lose $4.2tn due to impact of climate change, report warns

Terry Macalister The Guardian 24 Jul 15;

Private investors stand to lose $4.2tn (£2.7tn) on the value of their holdings from the impact of climate change by 2100 even if global warming is held at plus 2C, a report from the Economist Intelligence Unit (EIU) has warned.

If firm action is not taken at the forthcoming climate change talks in Paris and the Earth’s temperature warms by a further 5C then investors are facing losses of almost $7tn at today’s prices, new research shows.

This is more than the total current market capitalisation of the London Stock Exchange with impacts on company holdings that will come not just through extreme weather damage but also through lower economic growth.

The report argued that financial regulators should properly recognise “systematic environmental risk”. It also called for a proper carbon price to be established as well as a tough new climate change treaty to be agreed in Paris.

The latest assessments of the rising risks posed to the global financial system lends enormous new weight to those who are already arguing that companies must be made to disclose their carbon emissions.

“Investors currently face 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,” said Brian Gardner, the editor of an EIU report, entitled The cost of inaction: recognising the value at risk from climate change.

The $4.2tn figure is roughly the equivalent to the value of the world’s publicly listed oil and gas companies or the annual gross domestic product of Japan, the world’s third largest economy.

Nick Robins, co-director of the Inquiry into the Design of a Sustainable Financial System at the UN Environment Programme said that financial markets are not treating the threat posed by climate change seriously enough. “We wouldn’t get on a plane if there was a 5% chance of the plane crashing,” he said. “But we’re treating the climate with that same level of risk in a very offhand, complacent way.”

The EIU concludes that there are widespread opportunities for investors to reduce their exposure to environmental risk – one way is to invest in projects that finance a transition to a lower carbon economy.

But it also believes that climate change is likely to represent “an obstacle” for many asset owners and managers to fulfil their fiduciary duties to act in the best interests of those who lend their cash to invest.

According to estimates by the Asset Owners Disclosure Project, only 7% of asset owners calculate the carbon footprint of their investment portfolios and only 1.4% have an explicit target to reduce it.

The EIU follows warnings from the Bank of England about the financial risks posed to fossil fuel companies if global climate action renders their reserves of oil, coal and gas worthless. On Thursday, a report from the London assembly warned that the city was particularly vulnerable to financial risks posed by climate change because its economy is particularly well-connected globally.