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August 07, 2015
Investment Losses from Climate Change to Be in Trillions, Report States
    by Robert Kropp

The Economist Intelligence Unit warns that $4.2 trillion in assets could be at risk, with losses exponentially greater for every increase in global temperature.

In 2011, a groundbreaking report from Mercer warned that the economic cost of climate policy could lead to as much as a 10% increase in portfolio risk by 2030.

"Climate-related policy changes could increase the cost of carbon emissions by as much as $8 trillion over the coming 20 years," Danyelle Guyatt of Mercer said at the time. "The longer the delay, and the poorer the coordination in implementing the changes, the more uncertainty there will be for investors. The cost of impacts to the physical environment could exceed $4 trillion."

A little more than four years later, delays in effective climate policies persist. The Obama administration's
Clean Power Plan, the final version of which was announced just this week, has been hailed by sustainable investors and others as the most meaningful executive action on climate change in the US to date. The plan, however, is likely to face significant legal challenges before it is fully implemented. And further delays in reducing carbon emissions from power plants can only bode ill for the beleaguered planet.

Corroborating the dire forecast of Mercer, the
Economist Intelligence Unit recently published a report in which the estimated loss of global manageable assets due to climate change could be $4.2 trillion. Worse, the report continues, “Warming of 5°C could result in US$7trn in losses – more than the total market capitalization of the London Stock Exchange - while 6°C of warming could lead to a present value loss of US$13.8trn of manageable financial assets, roughly 10% of the global total.” And from a public sector perspective, 6°C of warming could lead to losses of $43 trillion.

Furthermore, “Climate change is likely to represent an obstacle for many asset owners and managers to fulfil their fiduciary duties,” the report states. “Fiduciary duty requires managers to act in the best interest of their beneficiaries...If investment managers are aware of the extent of climate risk to the long-term value of the portfolios they manage, then it could be argued that to ignore it is a breach of their fiduciary duty.”

However, according to a recent survey by the
Asset Owners Disclosure Project (AODP), only seven percent of asset owners calculate the emissions in their investment portfolios; only 1.4% of asset owners have reduced their carbon intensity from the previous year; and only 2% of asset owners have an emissions intensity reduction target for next year.

The Economist's report does note some positive developments in the policy realm. France, for instance, has mandated that “institutional investors to disclose information on sustainability factors in their investment criteria, and to explain how they take into account exposure to climate risks and how they measure greenhouse gas emissions associated with assets held in their portfolios.”

Yet, while such policies as those in France represent worthwhile steps in the right direction, the international coordination referred to by Guyatt of Mercer remains far from effective realization. Hope exists for meaningful agreements to come out of the Paris climate negotiations later this year; but the history of international climate talks has been depressing at best.

The Economist recommends several actions to be taken to avert the financial disaster that unchecked climate change will bring. Governments should delay not further in enacting carbon pricing that fully reflects the costs of externalities. Financial regulators need to recognize the materiality of climate change, and stock exchanges should require that all listed companies disclose their greenhouse gas (GHG) emissions.

Institutional investors must incorporate climate change into their risk assessments, the report continues. “Complete inaction is a failure to act in the long-term interest of their beneficiaries and could risk future litigation,” it states.


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