Transition to a low (or no) carbon economy

 

 

It can be argued that the world’s biggest contemporary market failure is climate change. It is therefore the role of governments to correct the failure. Government policy is needed through either fiscal measures, market mechanisms or regulatory intervention standards to correct market failures, so finance is a huge part of the solution

 

 

The implications of climate change for the investment industry

 

A policy shock transitioning to a sub two degree economic trajectory too quickly could cost investors in fossil fuels tens of trillions.

According to research commissioned by Aviva and conducted by the Economist Intelligence Unit warming of 5°C could result in US$7trn in losses – more than the total market capitalisation of the London Stock Exchange – while 6°C of warming could lead to a present value loss of US$13.8trn of manageable financial assets, roughly 10% of the global total.

 

 

Why do investors need information on companies’ climate-related exposures?

The world’s institutional investment community has a financial interest, as well as a fiduciary and moral duty to future generations to promote a rapid yet well managed transition to a net zero climate economy.

 

The transition risk, the physical risk and litigation risk will be very material for some sectors.

Better disclosure will enable investors to assess the impact of the three main types of climate risk on their portfolios.

 

Enter the TCFD

 

The encouragement of greater disclosures of the risks associated with climate change should stimulate a considerable growth in climate awareness among the boards of many companies around the world. This, in turn, will help asset managers and asset owners assess and manage climate risks in their portfolio, helping to improve the scale and effectiveness of their engagement with exposed companies in their portfolios. And this, in turn, will help prepare the economy for the transition to a lower carbon footing

 

 

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One thought on “Transition to a low (or no) carbon economy

  1. Abigail,

    This is a great blog. Well done. Governments have indeed a susbstantial role to play to correct this contemporary market failure which is climate change.

    I also share your view that fiscal measures or regulatory intervention by governments is needed for a transition to a low (or no) carbon economy.

    The TCFD are a huge step towards the achievement of the two-degree goal. However, I believe that the voluntary aspect of the disclosure is not enough and that disclosure should be compulsory.

    Some people believe that if disclosure is compulsory it will become a box ticking exercise. However, I personally believe that unless they are obliged to do so by some kind of law, many companies will still use the TCFD as a box ticking exercise i.e. for instance, enhance their brand image by showing compliance with the TCFD’s recommendations on their websites but not fully apply the recommendations.

    There is definitely a risk linked to this voluntary aspect of the TCFD. It may sound a bit cynical but I think that some companies will use this as an opportunity to give themselves a darker shade of green when they are actually “light green” or even still “brown”.

    It really is not because I am French since the French certainly do not get everything right but I must say that there is a reason why green bond issuance is much greater in France than in the UK so far and that is rooted in the law on Energy Transition and Green Growth (Article 173) which was voted a few years ago.

    Having no choice, corporations had to truly walk the talk and comply with it. Having said that there is still a long road to go until all companies are truly green in France.

    But again, I personally believe that compulsory disclosure is the right path to a quik transiton to a low (or no) carbon economy especially because time is of the essence when it comes to climate change. This is a stick and carrot issue and I appreciate that some people may think differently. This does not mean that I do not believe in the importance of educating the boards of major corporations but a stick approach is sometimes needed to drive quicker change.

    Like

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