With Mark Carney’s warning, investors may need to factor in climate change even if they don’t believe it’s really happening

30th September 2015 by John Lappin

If you are worried about climate change and the world’s inaction on the subject then you will be glad that the Governor of the Bank of England Mark Carney has intervened with a stark warning about the risks.

If you are opposed to the scientific consensus on anthropogenic (i.e. human-made) climate change, then you may have a very different opinion on the matter. You may not even believe it is a scientific consensus at all.

But whatever camp you are in, or indeed neither, what if you are an investor?

It is interesting that Mr Carney chose a speech to Lloyds of London to discuss the subject. Many insurance companies have already done a huge amount of work to calculate the risks because they insure many of the risks. That is hardly surprising certainly if Mark Carney is correct in asserting that inflation adjusted losses for the insurance industry have increased five fold to $50bn (£33bn) a year due to extreme weather events since the 1980s.

Yet this type of risk was only one of three listed.

He also said that liability risks could rise if those suffering from climate change sought compensation. So let’s be cynical: Tuvalu may not have the legal budget to sue, but what about lower Manhattan?

The final risk, Mr Carney said, is an adjustment risk as asset prices fall, which might be the biggest risk to portfolios of the lot.

Mr Carney says the Financial Stability Board, which he chairs, is considering recommending to the G20 summit that more be done to develop “consistent, comparable, reliable and clear disclosure around the carbon intensity of different assets”.

That must be something that all investors, warmers, luke-warmers, and out and out sceptics alike need to take notice of, because often companies – notably oil, but many others – are build around these assets.

That surely will have an impact on pricing, and that is before we come to consider whether companies will eventually be told to leave it in the ground. (Note that for the moment, Shell is leaving it in the ground in the Arctic too).

Some of this, of course, depends on what kind of investor you are. You may have screwed your courage to the sticking post and bought into Glencore in the last few days. Or if you are as brave as Henry V and MacDuff put together maybe even Volkswagen!

You may still like the long term energy story, and can see value created by the low oil price or at least in some of companies in the chain, if not perhaps in the oil majors. But even for short term investors you may need to consider the price implications of any new regulations.

Certainly, if you are a long term investor gradually building up a portfolio or wishing to maintain it as you an income, then it may make sense to stress test your investments against climate concerns, especially as it could impact on what would once have been regarded as sleep-at-night types of securities. (That German car maker again)

If regulations and disclosure and even outright bans on certain things, become the global norm, then it must impact on a host of investment decisions.

Being kind to Volkswagen, you might even suggest that its problems at least partly stem from a lack of certainty and grey areas in the regulations. (Actually that is being very, very kind). Yet it does demonstrate that increasingly that the environmental concerns of governments and supranational institutions will have a dramatic impact on investment decisions.

That means that you could be deeply sceptical about the science, the probabilities and the warming data set, but you may still have to factor governmental action on climate change, and, crucially, the thinking of other investors into your decisions in future.


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