This piece originally appeared on AlternativesJournal.ca
When you think about the impacts of climate change what comes to mind? Forest fires? Floods? The fate of future generations? How about your finances?
Climate change--and the fight to stop it--will create winners and losers. Climate risk is the concept the financial world uses as they seek to understand who those winners and losers will be.
How will the falling price of solar panels affect oil company stocks and how fast will that happen? How likely is a given infrastructure project to be damaged by flooding? Which soft drink companies or food producers will fare better or worse in a water-scarce world?
Why care? Because your retirement savings could depend on it.
This is important stuff for everyone to understand. If you own investments, insurance or have a pension, take 60 seconds to read on.
To see how seriously major banks and investors are taking climate risk, consider the following. Blackrock, the world’s largest investor, has put its investees on notice, urging them to disclose financial risks related to climate change. Last summer, the firm used its shareholder voting rights to force Exxon to explain how it would be impacted by global action to limit climate change to 2℃. The European Union is moving to make disclosures mandatory by 2020, while institutional investors in France are already required to disclose climate risks by law.
By pushing for climate risk disclosure, major investors are asking companies to be transparent about the risks they are facing both from the physical impacts of climate and the transition to a low-carbon economy. The financial world runs on information, and the idea is that disclosure will help investors make more informed investment decisions.
Talk of a carbon bubble is a warning of what may happen if risks are not well disclosed. The Economist recently reported that markets are underpricing climate risk to a dangerous degree. In other words, companies, particularly those involved in the fossil fuel industry, may be overvalued because their exposure to climate change isn’t reflected in their share price.
The good news is, investors are not only gathering information on climate risk, they’re acting on it, and that could make a big difference for the climate. For example, an increasing number of institutional investors are investing in green bonds backed by environmentally-friendly projects predicted to fare well in a low carbon future. While the vast majority of green bonds are still restricted to institutional investors, companies like CoPower are now offering green bonds for retail investors.
What are the different types of climate risk?
There are two broad categories of climate risk: physical risk and energy transition risk.
The physical risk from climate change can include damage to fixed assets, like buildings and property, or supply chain disruptions. They can result from extreme weather events or changes in water availability, for example.
Investors are now able to track these risks in impressive detail. Deutsche Bank, for example, is using a map of more than one million corporate, manufacturing and retail sites globally to gauge companies’ exposure to climate disruptions like hurricanes, heat waves, rising sea levels, droughts and wildfires.
Energy transition risk
As Governor of the Bank of England Mark Carney has warned, meeting our global target of limiting climate change to 2°C target “would render the vast majority of oil, gas and coal reserves stranded”, literally unburnable.
Energy transition risk refers to the risk faced by high-carbon companies and industries if the world successfully transitions to a low-carbon economy through policy, legal and technological change in support of the 2°C target in the Paris climate agreement.
Policies that create winners and losers
Carbon pricing is an example of policy risk. As it becomes more expensive to burn fossil fuels due to a carbon tax or cap and trade scheme, reserves or pipeline infrastructure once valued highly on an oil company’s balance sheet could become liabilities. Or, as countries implement clean fuel standards, companies producing the most efficient vehicles will have an advantage.
Amongst fossil fuel assets, the dirtiest and most expensive are more vulnerable to energy transition risks. Just look at the decline of the coal industry over the past five years. Similarly, industries that are significant consumers of fossil fuels, for example, steel or cement manufacturing, are vulnerable to these risks as well.
As the “carbon bubble” concept suggests, an abrupt transition risks destabilizing the financial system. This underlines the importance of early, effective policy action. Policies that allow businesses to plan for a smooth shift away from fossil fuels would be preferable to help avoid sudden shocks.
Big oil vs.
As real as climate change is the risk of litigation. Columbia Law School in New York tracks the number of climate change-related legal cases that have been brought forward globally: 1,185 as of this month.
These cases most commonly seek to hold governments or fossil fuel companies accountable for the damage they are causing, and for inadequate action in the face of clear climate science. High profile cases include New York City vs. Shell & Exxon and the victory of 866 citizens over the Dutch Government, which must now increase its cuts to emissions. Their success will most likely hinge on the ability to draw a direct connection between an impact--e.g. Hurricane Sandy--and the actions of company or government.
Threatened by disruption
The landscape of low carbon technologies is changing fast and costs are falling rapidly for technologies like solar PV or electric vehicles. How quickly they’ll be able to compete with and replace carbon-intensive technologies is the question investors are asking.
Get your portfolio on the right side of the low carbon transition
The flip side of climate risk is, of course, opportunity. In the long term, where investors in carbon-intensive assets may lose, investors in cleaner assets may win.
The first step to getting your own portfolio ready for the transition is taking a look inside. As CoPower’s own research has shown, your investments may have more of an impact on your carbon footprint than any other individual action. Check it out for more information on how to measure the carbon footprint of your portfolio and consider which climate-friendly investments--like CoPower Green Bonds or a fossil free exchange-traded fund (ETF)--might be right for you.
Then there are those who manage our money. Is it time to have a conversation with your wealth advisor or pension fund manager about climate change? Money talks, and being clear that this is as much about mitigating against financial loss as it is about doing the right thing for the planet is a powerful strategy for change.
Lauryn Drainie is CoPower's Manager of Marketing and Engagement, helping build a community of individuals investing for profit and planet. Lauryn's passion for fighting climate change stretches back over a ten-year career in community and online campaigning with Change.org and the Climate Action Network Canada. You can read more about Lauryn here.