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