Why the investment industry has a responsibility to address the impacts of climate change sooner rather than later to best protect the interests of investors and their beneficiaries.
The climate crisis is looming very large at present both at a personal level and in the investment industry. There has never been more focus on its ramifications and yet it seems the industry is not acting swiftly or definitively enough to address them.
In recent years there has been a proliferation of net-zero commitments. For example, the Net Zero Asset Managers Initiative (NZAMI) has 273 signatories representing US$61.3 trillion in assets under management. However, these commitments do not yet represent the majority of the industry and implementation of required changes to meet these commitments is proving difficult as well as slow.
There are many reasons why but fundamentally transitioning the economy and preserving the current climate will require change at every level, government, corporate, investment and individual. Also, change is hard and goes hand in hand with uncertainty, which humans generally don’t like.
There is also a question about how much responsibility the investment industry has in aiding the transition to a lower-carbon economy and improving the climate-change trajectory. Thinking Ahead has done research into this space and found that the industry is responsible for 25% of all emissions. An indication that the industry should be motivated to act.
In our most recent paper, Pay now or pay later?, we translate the economic costs and physical impact risks of climate change into the effect on financial assets in the long-term. By doing this it is possibly to quantify the relative cost of transitioning the economy at slower or faster rates.
In this paper we observe that risk increases rapidly as temperature rises. This is concerning given Climate Action Tracker’s most optimistic scenario, that we are heading for 1.8C warming by 2100. And that by continuing in a business-as-usual manner we could see a temperature rise of between 2.7C and 3.6C. According to the IPCC, at a temperature rise of 2.7C we could experience simultaneous crop failures in breadbasket regions across the world. This would have huge ramifications for feeding humans and livestock globally and for the production of biofuels. These are just a few of many predicted physical impacts at this temperature.
Moreover, this temperature rise prediction could be considered conservative. Historically the extent and impact of climate change has been underestimated by scientists who will often focus on the outcomes where there is the greatest confidence, discounting uncertainty. This is in part due to vested interests and political lobbying which has significantly slowed down the pace of action during the last 30-40 years. This is a considerable issue as the decisions made now will determine what long-term outcomes are possible.
What is becoming clear is that the investment industry, with huge long-term financial obligations to billions of people, should – on a number of levels – be motivated towards a more rapid transition of the economy to net-zero carbon. Given the alternative, which is a climate transition to a state that scientists have deemed unsafe.
At only 1.2C warming we are already getting a taste of what this unsafe world might look like. In September we saw Hurricane Ian sweep through Florida in the US. This summer Europe was marred by deadly heatwaves and fires. In Pakistan 4 million acres of cropland have been destroyed in floods and China is in the midst of a record-breaking drought. In each of these extreme weather events we have seen a loss of human life and a significant impact on food distribution and production. What might a 3.6C warmed world look like? We cannot know for sure but if we also consider climate tipping points we are entering into a dangerous era.
There is an added motivation for the investment industry to move quickly. According to our research, transitioning the economy to a well below 2C scenario, might see a loss of 15% of existing financial assets. This loss could be, at least partly, offset by the positive benefits of new primary investment. At the very least, providers of this financial capital could expect to see future returns after the initial drawdown. For the economy there could be an immediate boost from spending on wages and capital goods and associated cost reductions and productivity boosts. If we also attempt to steward a highly co-ordinated and orderly-as-possible transition, transition costs could be further mitigated.
However, if the industry continues in a business-as-usual way, there could be a 50-60% downside to existing financial assets, taking into account climate tipping points and flaws in existing climate modelling. This is aligned with the path that we are currently on. A strong signal that the industry needs to increase its efforts.
Transitioning the economy will incur costs, that is a given. How much will depend on how quickly the global economic system can adapt to address climate change. The investment industry, as an influential part of this system, will realise the added risks and costs of delayed action. As an adaptive and competitive industry, it would be surprising if key players don’t recognise the overall benefit of addressing the impacts of climate change sooner rather than later.