19. Climate Change and Associated Risks for Investors Dr. Maximilian Horster
Managing Director, ISS-Ethix Climate Solutions
Climate change has been propelled to the forefront of many investors’ minds. Governments and civil society actors are both interested in and concerned about the environmental consequences of large investors’ climate impact, with the “divest from fossil fuels” movement driving climate change up the agenda. Research like Carbon Tracker’s “Carbon Asset Risk: From Rhetoric to Action”1 and the report “Developing 2°C Compatible Investment Criteria”2 (co-authored by 2 Degree Investment Initiative and German Watch) as well as sell-side research have hugely increased awareness of this topic. The 2015 Paris Climate Conference (COP 21) ended with the world committing to curb global warming at 2°C. This implies a radical transformation of the world’s economy and, therefore, investor thinking. Some investments will be at risk, while others will benefit. Investors face different dimensions and levels of climate change–related risk. Such risks can be roughly divided into asset level risk and direct investor risk.
Asset Level Risk •• Climate change effects on the global economy and physical risk for individual assets: This can be, for example, extreme weather events impacting a company’s production facility. The insurance industry is dealing with such risks in the context of insuring disasters.3 •• Carbon pricing risk for underlying assets: This might include installations that become subject to carbon pricing, such as national or international taxes or cap & trade systems. The European Union Emissions Trading Scheme (EU ETS), for example, is the largest cap & trade system, covering over 11,000 factories in 31 countries.4 The profits and losses (and therefore stock and bond prices) of companies will be impacted by such systems once carbon prices increase. Hence, it becomes a concern for investors.
135
