LONDON - Investors’ climate change nightmares are getting easier to visualise. Back in April Sarah Breeden, who oversees the Bank of England’s work on climate change, warned of a climate “Minsky moment”. The reference to the economist Hyman Minsky, who theorised the onset of financial crises, envisages a sudden panic about global warming that causes equity prices to slump. New research for the United Nations-supported Principles for Responsible Investment attempts to put some hard numbers on this scenario.
Only investors who buried their heads in the sand could have failed to notice increasingly stark warnings about what will happen to the global economy if the planet’s temperature rises more than 1.5 degrees Celsius above pre-industrial levels. But most money managers have so far remained calm. That’s partly because of projections, like a much-cited forecast by the International Energy Agency, which assumes oil demand keeps rising until the 2030s. That gives energy giants like Exxon Mobil scope to keep pumping – and paying hefty dividends.
The obvious flaw in this thinking is that citizens could force governments to act faster. The PRI study assumes that the number of internal combustion engines peaks in 2025, due to sales bans and cheaper electric vehicles, and rigorous carbon pricing pushes up costs for higher emitters. It then models the impact on current stock market values by discounting the decline in cash flows.
Such a radical shift would make a mess of certain sectors. The valuation of the 10 biggest oil companies falls by a third. Some miners halve in value. Yet other industries appear to weather the storm. The consumer cyclicals sector – which includes cars – drops by just 5.2%, because some companies will shift to electric vehicles. Overall, the MSCI All Country World Index would lose just 3.1% of its value if politicians announced today that the measures will kick in in five years’ time. The benchmark is up about 20% this year alone.
Politicians can make matters worse by dragging their feet, though. If they delay a draconian shift to 2025, the PRI study forecasts the MSCI All Country World Index would drop by 4.5%.
It may seem suspect to put such precise figures on far-reaching policy shifts. It would also be surprising if some investors hadn’t already factored in Minsky-style climate risks. But the absence of clarity has allowed many to stick to business as usual. This will soon no longer be tenable.
- Government policies designed to meet the threat of climate change could permanently wipe between 3.1% and 4.5%, or $1.6 trillion to $2.3 trillion, off the stock market value of companies in the MSCI All Country World Index depending on when they are introduced, according to economic analysis published on Dec. 9.
- The research, by Vivid Economics and Energy Transition Advisors for the United Nations-supported Principles for Responsible Investment, projected that the 100 worst-performing companies in the MSCI ACWI would lose 43% of their current value, while the 100 best performers would gain 33%.
- The value of automakers with the highest investments in electric vehicles would increase by 108%, while that of the world’s largest listed coal companies would fall 44%. The 10 largest companies in the integrated oil and gas exploration and production sector would lose 31% of their current value, or $500 billion.
- Electric utilities with the strongest strategy for renewables could double in value, with laggards falling by two-thirds. Miners producing minerals critical for the transition could enjoy 54% upside, while those with the smallest share of green minerals could lose half their market worth.
(Editing by Peter Thal Larsen and Oliver Taslic)
© Reuters News 2019