The biggest investment risk you face
CLIMATE CHANGE: MANY RECOGNISE ITS RISK
Climate risk is compelling investors to reassess core assumptions about modern finance.
Every year the World Economic Forum puts out The Global Risks Report, which shows what 750 global experts and decision makers rate as the world’s most pressing challenges over the coming decade.
In 2020, for the first time ever, the top five risks identified by this group in terms of how likely they are to occur are all environmental.
As the table shows, environmental risks have been prominent for some time. However, they now completely dominate the list. In addition, the report identifies three environmental issues among the top five risks that could have the biggest impact if they are not addressed. The biggest risk the world faces, they believe, is that we fail to take action on climate change.
It is no longer a case that governments and business are waking up to this reality. That has already happened. It is now universally accepted that action needs to be taken.
This is true in financial markets as well. In his recent annual letter to CEOs, Larry Fink – chair and CEO of BlackRock, the world’s largest asset manager – announced that his firm’s active funds will be exiting their positions in any company that generates more than 25% of its revenues from thermal coal production.
It will also be using the strength of its large shareholdings in many companies through its index funds to engage more intensely around improving climate disclosures and aligning business models with a transition to a low carbon economy.
“Climate change has become a defining factor in companies’ long-term prospects,” Fink noted. “Last September, when millions of people took to the streets to demand action on climate change, many of them emphasised the significant and lasting impact that it will have on economic growth and prosperity – a risk that markets to date have been slower to reflect.
Investors cannot ignore this. If asset managers like BlackRock have had to adopt the policy that they will no longer be investing in certain industries, that has material implications for the share prices of companies in those sectors.
Equally, they need to be aware of how thinking in financial markets is shifting. It is now becoming untenable for asset managers to value companies and opportunities on financial metrics alone.
The essence of this is that the environmental risks identified by the World Economic Forum are no longer merely external issues for companies to consider. They are going to have a real impact on the way their businesses operate. This means they are real matters for investors to contemplate as well.
“Investors are increasingly reckoning with these questions and recognising that climate risk is investment risk,” wrote Fink. “Indeed, climate change is almost invariably the top issue that clients around the world raise with BlackRock.
“Investors are asking how they should modify their portfolios. They are seeking to understand both the physical risks associated with climate change as well as the ways that climate policy will impact prices, costs, and demand across the entire economy.”
CATASTROPHES. The top five global risks in terms of likelihood.