Europe's Largest Asset Manager Sees 'Tipping Point' on Climate Risk Pricing

The world’s deepest-pocketed investors are starting to take climate change seriously, according to Amundi SA.

by Anna Hirtenstein, Bloomberg, May 30, 2018

“We are really observing a tipping point among the institutional investors on climate change,” said Frederic Samama, co-head of institutional clients at the Paris-based firm. “Until recently, that question was not on their radar screen. It’s changing, and it’s changing super fast.”

Risks from global warming range from damage to physical assets from extreme weather to falling prices on fossil fuel-related assets, as the world moves away from burning coal and oil. Bank of England governor Mark Carney has repeatedly warned that these risks are not priced in adequately and that investors may have exposure to a “climate Minsky moment” if they don’t take action.

Amundi’s remarks hold weight because it has 1.4 trillion euros ($1.6 trillion) under management, making it the largest asset manager in Europe. It runs the world’s largest green bond fund with the International Finance Corp. and is planning to deploy $2 billion into emerging markets. Mainstream investors are beginning to recognize both the threats and opportunities coming from climate-related issues, Samama said.

“If we have this major shift required in terms of how we manage the planet, for sure it will impact the asset prices,” he said. “Can we evaluate the automakers without taking into account the new bans of diesel cars? Can we evaluate the fossil fuel industry without taking into account the risks of regulation related to the drop of the price of renewable energy?”

The Paris climate deal reached by representatives from nearly 200 countries in 2015 sent a signal to the global economy that decarbonization was on the agenda. As just about every industry comes under pressure to become greener, the rules will change for the asset owners as well. France was the first country to make it mandatory for investors to disclose the carbon footprint of their portfolios, mandating it in a law the same year.

Another reason that institutional investors’ views are evolving is the availability of green financial instruments, according to Amundi. The asset manager developed low-carbon equity indexes, removing the polluting companies from commonly-used ones such as the S&P 500 and MSCI indexes. Investors from the California State Teachers’ Retirement System to Japan’s Government Pension Investment Fund are shifting their portfolios to these indexes, according to Samama.

“It means that if nothing happens, you have the market returns and that if the opposite, if polluting companies are getting penalized, they will bring the index down and if you have excluded them, you will outperform,” he said.

Green bonds are another avenue for redirecting institutional capital into environmental projects. The industry has soared from non-existence just over a decade ago to global issuance of $163 billion last year.

©2018 Bloomberg L.P.

https://www.bloombergquint.com/global-economics/2018/05/31/europe-s-largest-asset-manager-sees-tipping-point-on-climate

Maize, rice, wheat: alarm at rising climate risk to vital crops leading to widespread famine

by Robin McKie, Observer Science Editor, The Guardian, July 15, 2017

Governments may be seriously underestimating the risks of crop disasters occurring in major farming regions around the world, a study by British researchers has found.

The newly published research, by Met Office scientists, used advanced climate modelling to show that extreme weather events could devastate food production if they occurred in several key areas at the same time. Such an outcome could trigger widespread famine.

The scientists, led by Chris Kent, of the Met Office, focused their initial efforts on how extreme weather would affect maize, one of the world’s most widely grown crops. Heat and drought were the prime risks, although flooding was also included in the analysis.

The group found there is a 6% chance every decade that a simultaneous failure in maize production could occur in China and the US – the world’s main growers – which would result in widespread misery, particularly in Africa and south Asia, where maize is consumed directly as food.

“The impact would be felt at a global scale,” Kent told the Observer. “This is the first time we have been able to quantify the risk. It hasn’t been observed in the last 30 years, but the indications are that it is possible in the current climate.”

An example of the kind of disaster that could occur is provided by the maize harvests that failed last year in Africa. Communities in Zambia, Congo, Zimbabwe, Mozambique and Madagascar were affected and six million people were left on the brink of starvation. A joint failure of China and America’s maize harvest would have a far greater impact.

Having studied the risks facing maize production, the group is now following up this work by studying climate impacts on the world’s other staple crops – in particular rice, wheat and soy beans – in order to assess how weather extremes could affect their production.

According to the UN Food and Agriculture Organisation, maize, rice and wheat together make up 51% of the world’s calorie intake. Billions of people rely on these crops for survival. Any disruption to their production would have calamitous consequences.

The trouble is that crop-growing methods and locations have changed considerably over time, as has the climate and the probability of extreme events, Kent told the Observer. “This means the number of relevant observations to the present-day growing of stable crops has been reduced, and that limits our ability to have useful estimates of the risks to the growing of these crops.”

To get round this problem, the team ran 1,400 climate model simulations on the Met Office’s new supercomputer to understand how climate might vary in the next few years and found that the probability of severe drought was higher than if estimated solely from past observations. The scientists concluded that current agricultural policies could considerably underestimate the true risk of climate-related shocks to maize growing and food supply.

The particular risk outlined by the study envisaged simultaneous catastrophic disruptions in China and the US. In 2014, total world production of maize was around 1 billion tonnes, with the US producing 360 million tonnes and China growing 215 million. If production in these two countries were hit by simultaneous extreme weather events, most likely droughts, more than 60% of global maize production would be hit.

A double whammy like this has never happened in the past, but the work by the Met Office indicates that there is now a real risk. In addition, there may be risks of similar events affecting rice, wheat or soy bean harvests. These are now being studied by the Met Office, which is also working with researchers in China in a bid to understand climate risks that might affect agricultural production.

“We have found that we are not as resilient as we thought when it comes to crop growing,” said Kirsty Lewis, science manager for the Met Office’s climate security team. “We have to understand the risks we face or there is a real danger we could get caught out. For now we don’t have the means to quantity the risks. We have to put that right.”

https://www.theguardian.com/environment/2017/jul/15/climate-change-food-famine-study

Lenders' Guide for Considering Climate Risk in Infrastructure Investments, January 2018

Acclimatise, Climate Finance Advisors (CFA), and Four Twenty Seven have released a new guidance document to increase the climate resilience of large infrastructure investments. The “Lenders’ Guide for Considering Climate Risk in Infrastructure Investments” clearly breaks down the ways in which physical climate risks might affect key financial aspects of prospective infrastructure investments. 

This guide provides a framework for questioning how revenues, costs, and assets can be linked to potential project vulnerability arising from climate hazards and draws attention to the potential opportunities emerging from resilience-oriented investments in infrastructure.

Ten sub-sectors, including airports, marine ports, gas and oil transport and storage, power transmission and distribution, wind-based power generation, data centers, telecommunications, commercial real estate, healthcare, and sports and entertainment, are analysed and illustrated with topical examples.

To learn more about this document, please visit our website and download the publication here.

Download the guide at this link:

http://www.acclimatise.uk.com/wp-content/uploads/2018/01/Lenders_Guide_for_Considering_Climate_Risk_in_Infrastructure_Investments.pdf

2017’s costly climate change-fueled disasters are the ‘new normal,’ warns major reinsurer Munich Re

“We have a new normal” thanks to climate change, explains leading reinsurer.

by Joe Romm, Climate Progress, January 4, 2018

HURRICANE HARVEY IMPACTS. CREDIT: GETTY IMAGES

It turns out 2017 was a uniquely disastrous year in more ways than one, evidenced by German reinsurer Munich Re’s recently released review of the year’s global catastrophes.

Led by massive, climate change-fueled hurricanes Harvey, Irma, and Maria, 2017’s natural disasters will cost insurers a record $135 billion. Adding in uninsured losses brings the total global damages to $330 billion, which is second only to 2011.

“We have a new normal,” Munich Re’s Ernst Rauch told Reuters. Rauch, who runs the group tracking climate change risks, pointed out that “2017 was not an outlier” in having more than $100 billion in insured losses (see chart below). “We must have on our radar the trend of new magnitudes,” Rauch said.

The big reinsurers like Munich Re make their money by insuring the companies that directly insure your property. Those smaller companies are often required by law to buy reinsurance because they lack the capital resources to pay out if there is a major disaster, like superstorm Harvey for instance.

Since the reinsurers must pay out billions and billions of dollars for such mega-disasters, they have a unique incentive to understand and predict trends in mega-disasters. That’s why companies like Munich Re and Swiss Re have been at the forefront of warning businesses and the public about the rise in extreme weather events due to climate change.

Indeed, back in September 2010, another year of stunning warming-driven extreme weather events, Munich Re issued a release noting it had analyzed its catastrophe database, “the most comprehensive of its kind in the world,” and concluded, “the only plausible explanation for the rise in weather-related catastrophes is climate change.” 

Then in October 2012, the company released a massive 274-page report, “Severe weather in North America,” analyzing weather catastrophes and related losses since 1980 to understand trends and their causes, including man-made climate change.

Munich Re found that the number of weather-related loss disasters has been rising much faster in North America than anywhere else, and concluded, “Climate-driven changes are already evident over the last few decades for severe thunderstorms, for heavy precipitation and flash flooding, for hurricane activity, and for heatwave, drought and wild­fire dynamics in parts of North America.”

Prof. Peter Höppe, who heads Munich Re’s Geo Risks Research unit, said at the time, “In all likelihood, we have to regard this finding as an initial climate-change footprint in our U.S. loss data from the last four decades.”

And last April, Munich Re published an article on “rapid attribution,” which explained that we can now rapidly determine how much intensity or frequency of some extreme weather events is affected by man-made climate change. Learning that, for instance, climate change has sharply increased the chances of individual extreme rain and flooding events – such as devastating August 2016 deluge and flooding of Baton Rouge, Louisiana – allows communities to do better planning and Munich Re to do better risk management.

The latest annual report amplifies the message that humans are changing the climate, boosting the intensity and frequency of extreme weather events, and that the longer we dawdle, the higher the costs we will incur. The only question is, is anyone listening?

https://thinkprogress.org/weather-disaster-record-cost-4948070d8e53/

Climate risk: going mainstream

The governor of the Bank of England and ExxonMobil shareholders are just some of those changing the narrative on climate risk, says Dylan Tanner

Once climate change becomes a defining issue for financial stability, it may already be too late

by Dylan Tanner, The Actuary, September 7, 2017

In June this year, the Financial Stability Board’s (FSB’s)Task Force on Climate-related Financial Disclosures (TCFD) published its recommendations on how the corporate sector should disclose climate risk to investors. The FSB apparently regards climate change as a systemic financial risk, as articulated in a speech by the governor of the Bank of England, Mark Carney, in 2015. Meanwhile, at ExxonMobil’s annual general meeting in May this year, a majority of shareholders demanded that the oil and gas giant discloses its thinking on climate risk more clearly.

Data, analysis and advice on climate risk to portfolios have been around and available to investors for at least 20 years. By the late 1990s, the UN Environment Program (UNEP) Financial Initiative was messaging regularly on the risk of climate-change-induced weather events to the insurance sector and hence the wider markets.

In 2000, the investor-enabled Climate Disclosure Project (CDP) began collecting and aggregating carbon emissions information from thousands of companies around the globe. Financial data sets such as MSCI, Thomson Reuters Eikon and Bloomberg create and sell climate-related metrics on companies as part of their environment, social and governance (ESG) offering.

These observations beg two questions. Is climate risk now going mainstream in portfolio assessment? If so, what has changed? 

The answer to the first question is almost certainly yes, given the mainstream remit of the FSB and the universal nature of ExxonMobil’s shareholder base. The answer to the second is more complex. A key reason that climate risk analysis has not been widely accepted by financial analysts until now is that the messengers have largely come from the climate change and sustainability communities. The UNEP’s remit is to solve environmental issues, not advise on financial risk. Data sets such as CDP and the ESG metrics are regarded as originating in the sustainability agenda, and are used by investors mostly to satisfy sustainable investment commitments rather than inform mainstream risk strategy.

A more significant reason is captured by Carney in his 2015 ‘Tragedy of the Horizons’ speech, where he notes the disconnect between time horizons for current financial risk assessment and manifestation of the effects of climate change.

Predictions come to pass

Two decades have passed since the CDP and UNEP initiatives began, and some of the early indicators of these risks are now appearing. One of these relates to the fossil-fuel production sector, where groups such as the Carbon Tracker Initiative have predicted that a variety of climate-induced pressures could threaten the value of the reserves of oil, gas and coal on balance sheets. In November 2016, Shell shocked the market by estimating that oil demand could peak in as little as 5 years, “driven by efficiency and substitution,” according to then chief financial officer Simon Henry.

A 2016 report from think tank InfluenceMap showed the disparity between the predictions of global electric vehicle (EV) proliferation by the oil companies and those of the automakers and regulators. Toyota predicts 100% EVs and hybrids by 2050 in its sales. France pledges to ban petroleum-powered cars by 2040, and India has a goal of selling only EVs by 2030. Yet, the report notes, ExxonMobil forecasts that EVs will account for “less than 10% of new-car sales globally in 2040.” For a company that probably derives more than 30% of its revenues from petroleum-related transport, this disconnect is a concern. Shareholders are correct to demand further disclosure on the climate risk scenarios it is working with.

Other sectors on investors’ radar when it comes to climate risk and its disclosure include utilities. Reputational, financial and regulatory pressure on the use of coal for power generation is growing, while incentives for the scale-up of renewables is similarly accelerating. Bloomberg New Energy Finance estimates new power generation capacity will be mostly solar and wind by 2040, leaving gas, and especially coal generation and related value chains, as niche businesses. The power sector is one with long-term horizons and multi-decade plant life cycles, so understanding management strategy on future scenarios is essential for investors.

Funds flex their muscle

Pension funds are an important part of the global financial system, with the top 6,000 funds holding around $26trn (£20trn) of capital market assets. They have the ability to create market trends, and account for a significant portion of revenue generated by the financial sector as a whole. 

One of the largest such funds is Norway’s Government Pension Fund Global, with close to $1trn in assets. It adopted criteria in late 2015, allowing it to “exclude companies whose conduct to an unacceptable degree entails greenhouse gas emissions.” In June this year, the smaller but still substantial AP7 pension fund of Sweden announced it was divesting from ExxonMobil and five other companies for violation of the Paris climate agreement. Many other such funds may follow this trend. Such divestment and exclusion actions may be the last resort in an engagement chain, or intended as a signal on acceptable corporate governance. In the case of the Norwegian fund, its managers have a direct remit from the country’s parliament to consider global climate change risk in its management.

Change in data needs

While climate risk is now mainstream, the data needs of the investment community have shifted. For one thing, they are now highly sector-specific. Certain industries, such as energy and power generation and energy-intensive sectors like cement, are the focus, and investors want to understand management thinking on climate issues. To this end, the FSB recommendations stress disclosure by companies on the “resilience of an organisation’s strategy under climate-related scenarios, including a 2 °C or lower scenario” and the regulatory, market, technology and other changes these will bring.

Crucially, the FSB also extends its recommendations to the financial sector, and urges asset owners to test the resilience of the portfolio under the same scenarios. This approach necessitates a focus on forward-looking corporate behavioural metrics and analysis, as well as the carbon emissions accounting approach. For example, investors need to understand the capital asset allocation strategy of an electricity utility, and how this relates to regulatory trends. Likewise, they need to understand whether an oil/gas company’s business model is based on expecting to continue to be able to suppress climate-motivated regulations, and likely scenarios should the political climate shift suddenly.

Mainstream methods apply

Disclosures in line with the TCFD’s recommendations do not feed into any legally binding financial disclosure processes, such as those of the U.S. Securities And Exchange Commission. As a result, achieving universal participation – especially by the most at-risk companies –remains a challenge. 

The TCFD and other disclosure systems aside, mainstream analysis of corporations by investors involves reliance on other sources of information, such as discussions with senior management and third-party investigations.

In the climate risk context, this process will spur the financial research and data sectors to acquire expertise, and perhaps to form unusual alliances with climate specialists in the NGO, academic and technology sectors, to better understand the nuances of portfolio, sector and company risk.

Dylan Tanner is executive director at InfluenceMap

http://www.theactuary.com/features/2017/09/climate-risk-going-mainstream/

Moody's: Climate change is forecast to heighten US exposure to economic loss placing short- and long-term credit pressure on US states and local governments

Climate change is forecast to heighten US exposure to economic loss placing short- and long-term credit pressure on US states and local governments

Moody's, Global Credit Research, November 28, 2017

New York -- The growing effects of climate change, including climbing global temperatures, and rising sea levels, are forecast to have an increasing economic impact on US state and local issuers. This will be a growing negative credit factor for issuers without sufficient adaptation and mitigation strategies, Moody's Investors Service says in a new report.

The report differentiates between climate trends, which are a longer-term shift in the climate over several decades, versus climate shock, defined as extreme weather events like natural disasters, floods, and droughts which are exacerbated by climate trends. Our credit analysis considers the effects of climate change when we believe a meaningful credit impact is highly likely to occur and not be mitigated by issuer actions, even if this is a number of years in the future.

Climate shocks or extreme weather events have sharp, immediate and observable impacts on an issuer's infrastructure, economy and revenue base, and environment. As such, we factor these impacts into our analysis of an issuer's economy, fiscal position and capital infrastructure, as well as management's ability to marshal resources and implement strategies to drive recovery.

Extreme weather patterns exacerbated by changing climate trends include higher rates of coastal storm damage, more frequent droughts, and severe heat waves. These events can also cause economic challenges like smaller crop yields, infrastructure damage, higher energy demands, and escalated recovery costs.

"While we anticipate states and municipalities will adopt mitigation strategies for these events, costs to employ them could also become an ongoing credit challenge," Michael Wertz (a Moody's Vice President) says. 

"Our analysis of economic strength and diversity, access to liquidity and levers to raise additional revenue are also key to our assessment of climate risks as is evaluating asset management and governance."

One example of climate shock driving rating change was when Hurricane Katrina struck the City of New Orleans (A3 stable). In addition to widespread infrastructure damage, the city's revenue declined significantly and a large percentage of its population permanently left New Orleans.

"US issuer resilience to extreme climate events is enhanced by a variety of local, state and federal tools to improve immediate response and long-term recovery from climate shocks," Wertz says.

For issuers, the availability of state and federal resources is an important element that broadens the response capabilities of local governments and their ability to mitigate credit impacts. As well, all municipalities can benefit from the deployment of broader state and federal aid, particularly disaster aid from the Federal Emergency Management Agency (FEMA) to help with economic recovery.

Moody's analysts weigh the impact of climate risks with states and municipalities' preparedness and planning for these changes when we are analyzing credit ratings. Analysts for municipal issuers with higher exposure to climate risks will also focus on current and future mitigation steps and how these steps will impact the issuer's overall profile when assigning ratings.

The report "Environmental Risks -- Evaluating the impact of climate change on US state and local issuers," is available to Moody's subscribers at:
http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1071949.

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https://www.moodys.com/research/Moodys-Climate-change-is-forecast-to-heighten-US-exposure-to--PR_376056