German institutional investors are more at risk from the bursting of the ‘carbon bubble’, especially if they have a large exposure to passive investments.
Pensionskassen and smaller insurance companies were particularly vulnerable to falling values of carbon-producing companies, said investment consultancy FERI and environmental group WWF in a new report.
For both organizations it is “a certainty” that the carbon bubble will burst, and “investors have paid too little attention to the carbon risks in their portfolios until now”.
Heinz-Werner Rapp, founder of the FERI Cognitive Finance Institute, said: “Because of the UN climate goals success, [the] prognosis and risk profiles of various industries are substantially altered.
“The topic is particularly time-sensitive in Germany because the regulatory framework regarding climate protection is set to become stricter soon.”
Germany has promised to completely substitute coal-fuelled energy production for renewable sources by 2035.
Pensionskassen and small insurers often use traditional, market-cap-weighted benchmarks and passive approaches and are less inclined to have bespoke equity and bond selections.
“There is also a danger in widely-used passive investment strategies as the carbon risks included in plain-vanilla indices is very often unknown to investors,” the report said.
In some carbon-intense sectors the resulting devaluation could amount to 50% or more, the researchers pointed out – and it has “already happened in the US coal industry”.
The report warned that less directly linked industries like car manufacturers could also be hit.
In an separate report, Hermes Investment Management urged investors to change their benchmarks and strategies to help achieve international climate goals.
“The current economic and financial models used by the investment industry need to be reconsidered if the targets outlined in the 2015 Paris Climate Change Agreement are to be reached,” it noted in a press release.
In its report, Hermes said it was “challenging to incorporate longer-term climate externalities” into the mostly short-term-oriented investment models of today.
“The question is how to review the benchmarks being used by the industry to account for a wider range of risks and opportunities within longer timeframes,” said Tatiana Bosteels, director of responsibility at Hermes.