Climate Change Investment Risk Is Non Zero

Is Climate Risk to Investment Value Significant?

A new report out of the Cambridge Institute for Sustainability Leadership (CISL) finds that climate change "may cause economic losses of up to 45 percent".

The report, entitled "Unhedgeable Risk",and which can be downloaded here, is framed by CISL as saying:

"Climate change may be the 21st century’s biggest threat to humankind, and investors are starting to realize that they’re not immune to the risks.

Most existing studies have focused on analyzing the direct physical effects of future climate change over the long term (post 2050), then discounted these risks to provide an estimate of their short-term impact.

Unhedgeable risk: How climate change sentiment impacts investment takes a different approach and looks at the short-term risks stemming from how investors react to climate-related information, from policy decisions and technology uptake, to market confidence and weather events.

Anticipating how the market may respond to long-term climate risks attempts to bridge the gap between the geophysical impacts of climate change over the longer term and the potential effects that climate risk may have on the economic and financial markets today.

This study sheds light on the vulnerability and resilience of different portfolio types to climate change-related risks. With this information, investors can start to understand how to hedge risk and invest in assets with lower potential of being affected by climate change risk."

A very different result came out of a Mercer report from earlier in 2015 entitled "Investing in a Time of Climate Change" which looked at potential individual sector value impacts as well as asset class impacts, and provided different results suggesting lower impacts.  Another 2015 report from the Economist entitled "The Cost of Inaction" suggested just over $4 Trillion at risk, again a lower figure.

Martin Wolf, respected columnist of the Financial Times, has long suggested that the financial risk behind climate change is not zero, and in fact the uncertainties inherent to climate change outcomes demands action.

Then we have the UK's Telegraph, a very conservative newspaper, talking about the stranded assets thesis, verifying the Carbon Tracker premise that much of the world's remaining fossil fuel reserves may simply need to be left in the ground.  Watch for a major Carbon Tracker Synthesis report soon, more on that over the next few weeks.

All of this culminates in a discussion of a remaining carbon budget.  The world's climate scientists via the IPCC say we have about 900 Gt of carbon to burn, and at 40-50 Gt per year,you can do the math and see we have less than 20 years at business as usual rates. So says the IEA as well,  as does the head of the Bank of England Mark Carney (a Canadian heralded for his success at navigating the Canadian economy).  

This BBC video of Carney is a clear portrayal of the status quo. Your current investments may not be affected, but they will be and soon.  

However, as per our PRI report on Reducing Emissions, climate change is complicated, energy is embedded in everything we consume, in all of transportation, in supply chains and well beyond.

And so changing the system will be very hard,it will be gradual and play out differently depending where you are.

But the transition to a low-carbon economy is an imperative if we are to not only have a world that we can thrive within, but also for the sake of the global economy.  Jobs will only come if we solve for climate change.  The world's economy cannot thrive in conditions that cause global strife or create hundreds of billions of climate refugees.

If we get on top of this now, we can win, and there will be financial outperformance for those who anticipate the future.  If we don't get it right, portfolio value will degrade anyway.

Sustainable investing therefore becomes the one paradigm within which we can solve for society's dangerous climate direction and for maximized value.