Climate Change Coming Your Way – 5 Things You Need To Know

Lately the global financial headlines have been intermixed with the ECB stimulus decision and the Federal Reserve rate increase at the same time climate change has slowly moved to the headlines of financial news and blog posts. All of a sudden climate change has become part of the financial commentary and moved from environmentalist and scientists to government leaders and central bankers. The recent Paris conference has brought about some new attention.  As a result of the conference Michael Bloomberg, the former New York City mayor, is to head a new global task force aimed at highlighting the financial exposure of companies to the risk of climate change.

Increased use of fossil fuels and carbons is not something new, the change in global warming and climate change was championed not many years ago by US Vice President Al Gore.  Increasingly, multinational food manufacturers and retailers are becoming aware that global warming threatens the commodities they buy – from coffee and cocoa to cereals – and are beginning to take steps to ensure their procurement around the world. Commodities from around the globe can and will be effected by shifting and change climate changes brought about by the use of carbon fuels.

This past spring, G20 Finance Ministers and Central Bank Governors requested that the Financial Security Board convene the public and private sector to consider how the financial sector can take account of climate-related issues. This follows a warning by Mr. Carney, in his role as Governor of the Bank of England, that investors face “potentially huge” losses from climate change action that could make vast reserves of oil, coal and gas “literally unburnable.”

Factors, including climate change policy, technological change, asset stranding, weather events and longer-term physical impacts may lead to financial tipping points for which investors are not presently prepared. This research shows that changing asset allocations among various asset classes and regions, combined with investing in sectors exhibiting low climate risk, can offset only half of the negative impacts on financial portfolios brought about by climate change. Climate change thus entails “un-hedgeable risk” for investment portfolios. Even in the short run, the perception of climate change represents an aggregate risk driver that must be taken into consideration when assessing the performance of asset portfolios.

The World Bank Group has announced a big increase in financing for climate to help meet rising demand from countries to tackle climate change. The Bank Group’s President Jim Yong Kim announced the institution could increase climate financing up to $29 billion annually by 2020, with the support of its members. Climate change poses a particularly high risk for people in developing countries, many of whom depend on agriculture, forestry, and fisheries for their livelihoods and have a limited or unreliable water supply.

Financial markets have yet to grasp the urgency of investing in measures to protect businesses and people from the worsening impacts of climate change, depriving those efforts of much-needed funds, climate finance experts said. The recent Paris conference focused on just this question along with the new ways to limit carbon and fossil fuel usage. Central banks and credit rating agencies have yet to wake up to the need for commercial banks and corporations to test their exposure to climate change, he told the Thomson Reuters Foundation in an interview at a carbon market conference in Barcelona.

At the ongoing conference in Paris the head of the Bank of England, Mark Carney announced the creation of a new “Task Force on Climate-related Financial Disclosures” to assess the accuracy with which the G20’s financial markets reveal their vulnerability to climate risk. Carney requested the task force to assess the “stress points” in the financial system from climate risk, and appointed Bloomberg to run the effort. The two identified the tumult wrought by climate change as a potentially major destabilizing force on the global economy. Carney characterized the task force as an effort to rectify the current “market failure” to provide adequate information to investors about climate risks, and a significant step in the effort to “transition to a low carbon economy.”

As the conference moves into day nine, attendees are hoping for a global agreement to emerge. Lets all hope.