Columbia Threadneedle Invetments' Chris Wagstaff considers what climate change risk comprises through the lens of an institutional asset owner.
The sources of climate change are largely man-made. Principal among them is the burning of fossil fuels, though process emissions from activities such as manufacturing, agriculture and waste management contribute significantly to the world's green house gas (GHG) emissions. Even the internet and its infrastructure generates as much CO2 as the entire airline industry.1 Combined, these activities continue to increase global temperatures, raise sea levels and perpetuate extreme weather, endangering livelihoods, health, habitats and economic activity.
Although climate change is a known unknown, most commentators agree that if left unchecked, its effects, as a global systemic risk, could be seismic. Indeed, a failure by all stakeholders to act more decisively on climate change could result in a deeply impaired economic and financial system. This would, in turn, severely inhibit the ability of asset managers to generate and asset owners to derive sustainable investment returns as well as expose asset owners to unacceptably high and largely unmanageable risks.
Figure 1 below sets out the UN Intergovernmental Panel on Climate Change's (IPCC) breakdown of GHG emissions by country, economic sector and gas.
Source: IPCC (2014) based on global emissions in 2010. Contributions of Working Group III to the fifth assessment report of the IPCC.
Given what has been discussed so far, perhaps unsurprisingly, environmental risks, climate action failure in particular, from both a likelihood and impact perspective, dominated this year's annual World Economic Forum (WEF) Global Risks Report, for first time in its 15 year history. This is illustrated by the data points in the top right hand corner of Figure 2.
Figure 2: Environmental risks dominate the World Economic Forum's Global Risks Report 2020
Source: Visual Capitalist, 17 January 2020.
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