Investors are ill prepared for a loss of asset value due to climate change, according to a poll conducted at the 2014 IPE Conference.At the event, 83% of delegates said they were badly or very badly prepared for such a development.
Although scientists cannot yet tell what four degrees celsius of global warming will have on the climate, there will be waves of disruption through various regions, with societies unable to cope, warned Howard Covington, chairman of the Isaac Newton Institute for Mathematical Sciences Management Committee and former director of New Star Asset Management.
He said the damage could be much greater if expectations about growth turn into expectations of decline. “At best, the effect would be zero, but in the worst case, portfolio values could drop 30%,” he said. In his opinion, the only way to cut emissions is a “€40trn investment to decarbonise the world”, which he described as a “cost-free project that will decrease risk”. Torben Möger Pedersen, chief executive at the €23bn scheme PensionDanmark, said he saw opportunities for long-term investments in renewable energy, also because its risk factors were very different from those in equity markets. In his opinion, investors should focus on a “win-win approach”, as financial considerations could also support an anti-climate change agenda.
As an example, he cited investments in energy-efficient buildings, which would not only help slow down climate change but also benefit the building sector. PensionDanmark has committed 10% of its assets to direct investment in the renewable energy sector, he said.
Covington further highlighted the importance of “more assertive” engagement with fossil fuel companies, aimed at encouraging them to develop transition plans to sustainable energy. Investors should also try to stop fossil fuel companies from lobbying against emission reduction and make them support a higher carbon price, he said.
In the opinion of Pascal Blanqué, CIO and deputy chief executive at Amundi Asset Management, investors could benefit from exploiting risks, such as the mispricing of emission rights. He also identified risk factors, such as volatility and low liquidity, for investing in fossil fuel companies. Blanqué suggested pension funds should increase investments in water from assets available for passive management. Pederson underlined the importance of a consistent EU policy for investments in infrastructure programmes.