This is part 3 of a 3 part blog series about recent analyses on climate change and finance: Citi’s ENERGY DARWINISM II: Why a Low Carbon Future Doesn’t Have to Cost the Earth, Economist Intelligence Unit’s The cost of inaction: Recognising the value at risk from climate change, Mercer’s Investing in a Time of Climate Change and CIEL’s own analysis (Mis)calculated Risk and Climate Change: Are Rating Agencies Repeating Credit Crisis Mistakes. On the bases of these analyses and in the first two parts of the blog, I discuss why a low carbon economy is necessary and relatively inexpensive. In this part, I discuss why investors must address climate-related risk now, regardless of what occurs in the long term from climate change impacts or climate change policy.
A report issued yesterday shows not only that a growing number of investors are addressing climate related-risk, but also that the “movement to divest from fossil fuels and invest in renewable energy and climate solutions has exploded, growing 50-fold in just one year and topping $2.6 trillion[.]” These investors know that they cannot wait to see what additional impacts of climate change will come; they must act now. Not only are they acting on the responsibility to stop climate change, they are acting in their own financial best interests.
These interests are informed by Mercer’s Investing in a Time of Climate Change. Mercer provides a methodology for evaluating climate-related risks based on four factors: Technology, Resource Allocation, Impacts, and Policy (TRIP). The TRIP analysis provides the tools to assess how these four factors affect different investment choices. For example, in the next 3-5 years, technology advances in energy storage (Technology) could impact many different asset allocation choices.* Or more extreme weather events (Impacts), such as drought-induced wildfires, will affect real estate investments. Investing in a Time of Climate Change demonstrates that climate-related risk not only impacts investments in the long-term but that short-term shocks are also a real risk.
These short- and long-term risks and the huge ramifications of climate change require a major shift in capital markets. Indeed, it is time that global investors evaluate the risks presented to their portfolios and the globe. As the Economist Intelligence Unit writes
global investors are currently facing a stark choice… Either [investors] will experience impairments to their holdings in fossil-fuel companies should action on climate change take place, or they will face losses to their entire portfolio of manageable assets should little mitigation be forthcoming. Charting a path away from these two options should be a strong motivation for long-term investors to engage with companies in their portfolios and to shift investments towards a profitable, low-carbon future.
CIEL’s (Mis)calculated Risk focused on this “choice” in the context of credit rating agencies and found that according to publicly available documents: “The financial risks from a dynamic climate trajectory—both decreased fossil-fuel demand under a 2°C climate scenario and climate impacts under both 2°C and ≥4°C climate scenarios—are not adequately expressed in the methodologies of rating agencies.” Accurate credit ratings in the climate change context are important because overstated credit ratings threaten not only investors and markets, but also contribute to over-investment in asset classes (such as fossil fuel infrastructure) that threaten our ecosystems and the people who depend on them.
This week’s divestment news ($2.6 trillion assets under management committed) shows that overinvestment in fossil fuels is avoidable and that the capital shift towards the low-carbon economy is not only underway—it is accelerating. As Christiana Figueres, Secretary General of the UN Framework Convention on Climate Change, recently said, “Folks, we are moving toward a low-carbon economy. It is irreversible; it is unstoppable. So get on the bandwagon.” CIEL’s own analysis and the solid analyses from finance powerhouses, such as Citi, Mercer, and the Economist Intelligence Unit, shows that a low-carbon future is necessary, relatively inexpensive, and investors must plan for the different climate change scenarios. So to echo Ms. Figueres: Folks get on the bandwagon.
*Transformation on the renewable energy sector has occurred much more quickly than anticipated. As Greenpeace stated on releasing its most recent Energy [R]evolution –predictions on renewables:
“While our predictions on the potential and market growth of renewable energy may once have seemed fanciful or unrealistic . . . It wasn’t the IEA, Goldman Sachs or the US Department of Energy who got it right. It was Greenpeace’s market scenario which was the most accurate.”
Originally posted on September 24, 2015.