Investors need to reduce financial downside risks from climate change

Oksana Patron

11 November 2022

Investors have been urged to reduce up to 60% of financial downside risk resulting from climate change as risks associated with the change can translate into the effect on financial assets and the investment industry, leading potentially to major changes in global gross domestic product (GDP).

According to the recent research from the Thinking Ahead Institute (TAI), the coordinated and orderly transition to a sustainable economic model may help offset partially losses thanks to the positive benefits of new investments in energy infrastructure while financial capital providers could expect to see future returns after the initial drawdown.

Investors should also consider that, in this scenario, there could be a boost from spending on wages and capital goods and associated cost reductions and productivity boosts.

According to the research, by the end of the century, investors could face a 50 to 60% downside to existing financial assets in a 2.7C to 3.6C world, compared to a 15% loss in a well-below 2C transitioned world economy.

With this approach, it would be also possible to quantify the relative cost of transitioning the economy at slower or faster rates given that climate tipping points and flaws were factored in in existing climate modelling and would show that risk increased rapidly as temperature rose.

The TAI’s co-head, Tim Hodgson, said the findings of the research should help investors understand that without significant efforts to transition to a sustainable economic model, the associated physical risks driven by continuing emissions and climate change would potentially lead to changes in global GDP and income levels in the coming century.

However, the time was now for governments to take action at a much bigger scale than seen to date in order to drive a sustainable future.

“The investment industry has a role to play in allocating capital to climate solutions, engaging with investee companies and advocating for more a significant response to the climate challenge. It is clear that the time for more ambition on action is now,” Tim Unger, head of sustainable investing for WTW in Australia, said.