The big­gest in­vest­ment risk you face


The Citizen (KZN) - - Business - Pa­trick Cairns

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.

Tak­ing hold

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.

Left be­hind

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.”

Fo­rum’s The Global Risks Re­port Source: World Eco­nomic

CATAS­TRO­PHES. The top five global risks in terms of like­li­hood.

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