|30 January, 2020

The financial industry should prepare now for a "carbon correction"

David Craig is the founding CEO and board member of Refinitiv. David sits on the World Economic Forum (WEF) Digital Disruption Innovation Group and the WEF AI and Automation in Financial Services steering committee, presenting at Davos the last three years. He is on the Advisory Council of TheCityUK and the CityUK China Markets Advisory Group (Chairing the Fintech group). David has authored white papers on regulation, fintech, Fx and Artificial Intelligence and is also a fintech investor.

Website: https://www.refinitiv.com/en

Over the last week or two some of the world's biggest companies signalled that 'business as usual' must end

It feels like big business has woken up to the climate crisis with a start, and our number crunching suggests they are right to do so.  

Over the last week or two some of the world’s biggest companies signalled that ‘business as usual’ must end. Microsoft’s bold pledge on Thursday was a big moment, but Blackrock’s announcement to put sustainability at the heart of its investment decisions could be a game changer. With more announcements inevitable next week at the World Economic Forum in Davos, momentum is building. 

Climate change and sustainability seem to be the first thing I’m hearing in meetings with clients and other business leaders right now. So what’s behind this apparent change of tack? The first thing to say is that the concern in boardrooms feels absolutely genuine. The horrific images from Australia moved us all.. 

But leaders are also applying a rational, business-focused lens to this issue: not only will their consumers harshly judge companies on the wrong side of this debate, financial markets are increasingly punishing the laggards.  

As-yet-unnoticed threat
The financial consequences are becoming clearer every day, but we think there’s another, as-yet-unnoticed threat that the climate crisis poses to both corporate balance sheets and the broader global economy. As you’d expect, at Refinitiv we’ve been pouring over the data and we think it’s a risk that could amount to as much as 13% of revenues for those companies with the greatest exposure. 

Please bear with me while I try to explain. The world emitted roughly 55 giga-tonnes of carbon dioxide or CO2 equivalent last year. Yet only 20% of those emissions were taxed, and at a level (around $28 a tonne) that most economists and climate scientists say is too low to have enough impact on emissions. If a levy were applied to every one of those 55 giga-tonnes, then the tax take would shoot up from around $220 billion today to around $1.5 trillion. A ‘carbon gap’ of around $1.2 trillion might sound like a big number, but it’s fairly manageable at an individual corporate level (the additional cost for the average company would be around 1% of revenue).  

However, increase the level of carbon taxes to $75 a tonne of CO2 (a level the IMF has said is needed to limit temperature increases to around two degrees) and companies in sectors including construction materials, utilities, metals and mining and airlines could face a major impact, based on our analysis of around 3,000 publicly-listed entities. Applied to all emissions globally, and the carbon gap yawns to almost $4 trillion, or around 4% of world GDP. 

Simply put, this is a cost that global businesses have not factored in. And they need to. The message from policymakers around the world is coming through loud and clear: “the world needs to tax carbon at a realistic level and we are increasingly likely to do just that, given the urgency of the crisis.”  

Even if I’m wrong and policymakers fail to act decisively on this issue, business leaders need to weigh up the probability that they might act - and the cost that would entail. For the most exposed companies it could threaten their very existence.  

So my advice to peers at Davos next week will be to act on this issue and get ahead of the curve. The "carbon correction" is coming. The only question is, how quickly.

Disclaimer: This article is provided for informational purposes only. The content does not provide tax, legal or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Read our full disclaimer policy here.

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