Low-carbon transition puts $10trn at risk for inactive investors

A global coalition of financial investors has warned that more than $10trn (£7.7trn) in portfolio assets could be lost if the sector and governments fail to rapidly transition to a low-carbon economy.

A group of 20 institutional investors across 11 countries convened under the UN Environment Finance Initiative (UNEP FI) has launched a report outlining the need for the sector to pursue “green revenues” that mitigate potential financial losses caused by climate change.

The report notes that inaction on climate change will lead to financial losses for the largest 500 investment managers, which have assets under management totalling $81.2trn (£62.4trn). According to the report, the ongoing shift to limit global warming to no more than a 1.5C increase – as outlined by the Intergovernmental Panel on Climate Change (IPCC) – poses a significant transitional risk for investors, affecting up to 13% of overall portfolio value, equating to $10.7trn in losses.

“We now know for sure that climate change will alter our living environment radically for the worse,” UN Assistant Secretary General and Secretary of the UN Environment Group’s Satya Tripathi said.

“If we are serious about the future of our civilization and about delivering the Paris Agreement, we will have to fully decarbonize the economy by 2050, requiring no less than a ‘green industrial revolution’. It is still possible for us to act decisively to prevent catastrophic damage to the very web of life that sustains all species on the planet, including us humans.”

According to the report, government inaction on climate change will add an extra $1.2trn (£0.9trn) in costs and risks for the 30,000 largest listed companies.

The investors that led this work are Addenda Capital, Aviva, Bentall Kennedy, Caisse de Dépôt et Placement du Québec, Citibanamex, City Developments Limited, Desjardins Group, DNB, Investa, KLP, La Francaise Group, LaSalle Investment Management, Link REIT, Manulife Asset Management, M&G, Nordea Investment Management, Norges Bank Investment Management, Rockefeller Asset Management, Storebrand Asset Management, and TD Asset Management.

The report notes that utilities, transport, agriculture and the mining and petroleum refining sectors all stand out as “high policy risk” for investors. Notably, policy and technology shifts will make it so companies in emissions-intensive sectors become less competitive.

Revenue opportunities

However, the report also notes the potential economic benefits of achieving the transition to the 1.5C scenario, which would require net-zero emissions by the 2050s.

Stronger climate policies would lead to opportunities to generate new profit streams. Under the Paris Agreement’s 2C scenario, for example, green profits generated by the 30,000 listed companies would reach $2.1trn.

The report also notes that technologies advancements would offset any financial losses under a 3C, 2C and 1.5C scenario. In fact, low-carbon revenues generated in a 1.5C world are six times that of a 3C world, the report notes.

Finally, the report notes that investors must improve transparency on reporting climate-related opportunities and risks, imploring firms to report in line with the recommendations from the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD).

“The planet does not have time for excuses,” Aviva’s chief executive Maurice Tulloch added. “Investors have a central role to play in moving the world to a low-carbon future. This collaboration shows how we can all take better decisions, for our customers and for the environment.

“Aviva will keep calling for proper disclosure from the companies we invest in, while working with regulators and policymakers to make sure capital markets properly take account of these risks. The cost of doing nothing is far greater than any costs incurred by taking action.”

Matt Mace