The asset management industry—and thus the wider community of investors of all sizes— is facing the prospect of significant losses from the effects of climate change. Assets can be directly damaged by floods, droughts and severe storms, but portfolios can also be harmed indirectly, through weaker growth and lower asset returns. Climate change is a long-term, probably irreversible problem beset by substantial uncertainty. Crucially, however, climate change is a problem of extreme risk: this means that the average losses to be expected are not the only source of concern; on the contrary, the outliers, the particularly extreme scenarios, may matter most of all. The findings in this report indicate that climate change is likely to represent an obstacle for many asset owners and managers to fulfil their fiduciary duties.
Brian Gardner, the editor of the report, said: “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 of climate risk 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.”
Date Published: July 24th 2015
Why read this report
- The value at risk to manageable assets from climate change calculated in this report is US$4.2trn, in present value terms. The tail risks are more extreme; 6°C of warming could lead to a present value loss worth US$13.8trn, using private-sector discount rates. From the public-sector perspective, 6°C of warming represents present value losses worth US$43trn—30% of the entire stock of the world’s manageable assets.
- Impacts on future assets will come not merely through direct, physical harms but also from weaker growth and lower asset returns across the board. The interconnected nature of the problem will reduce returns, even on investments unharmed by physical damage.
- Although direct damage will be more localised, indirect impacts will affect the entire global economy; accordingly, asset managers will face significant challenges diversifying out of assets affected by climate change. Institutional investors need to assess their climate-related risks and take steps to mitigate them; very few have begun to do this.
- Regulation has largely failed to confront the risks associated with climate change borne by long-term institutional investors. To enable meaningful risk analyses, public companies should be required to disclose their emissions in a standardised and comparable form. This report analyses the current state of regulation and proposes steps towards more effectively addressing climate-related risks.
We wouldn’t get on a plane if there was a 5% chance of the plane crashing, but we’re treating the climate with that same level of risk in a very offhand, complacent way.