Markets are underprepared for climate-related policy risks

As I look forward to our biggest ever PRI in Person, where we’ll be welcoming over 1,700 delegates and 100 expert speakers from across the investment industry and beyond, one issue is front of mind – the Inevitable Policy Response to climate change.

More and more in my conversations with PRI signatories across the globe, I hear concern from investors that they are unprepared for the risks and opportunities created by the climate transition. The PRI shares this concern, and in particular we believe that markets today are exposed to significant climate-related policy risks.

As we all know, government action to tackle climate change to date is highly insufficient to achieve the commitments made under the Paris Agreement. And the market’s assumption appears to be that no further climate-related policies are coming in the near-term.

But this situation is not sustainable, the realities of climate change will inevitably catch up with governments across the globe – and they are beginning to. As teenagers march on parliaments, the pressure for climate-related policy increases from all angles – environmental, social and economic – fueled by fears over national security and enabled by advances in technology and upward pressure by electorates and businesses to act.

The question for investors now is not if governments will act, but when they will do so, what policies they will use and where the impact will be felt. At the PRI, we forecast a response by 2025 that will be forceful, abrupt, and disorderly because of the delay as the most likely outcome – leaving investor portfolios exposed to significant risk.

We forecast a response by 2025 that will be forceful, abrupt and disorderly because of the delay – leaving investor portfolios exposed to significant risk

It’s clear that investors need to act now to protect and enhance value. The greater the delay in responding, the greater the potential cost.

Preparing financial markets for climate-related policy risks

In anticipation, the PRI, Vivid Economics and ETA are building a pioneering forecast of the financial impact of this Inevitable Policy Response, with the aim of preparing financial markets for climate-related policy risks. It will provide investors with a unique tool for navigating a complex, evolving policy and regulatory landscape – to enhance portfolio resilience and inform strategic asset allocation.

For those that aspire not merely to better price-in policy developments, but to themselves contribute to goals such as the Paris Agreement target of limiting warming to 1.5C, myself and the PRI of course encourage such ambition. The Inevitable Policy Response project therefore also includes an aspirational discussion that highlights the challenges such an ambition will need to overcome given current political and technological realities, and pinpoints specific areas where stakeholders need to act now to achieve such goals.

I’m delighted that after months of preparation, we will be releasing some of the project’s major research papers at PRI in Person, ahead of the release of the preliminary system-level model results which will be launched at New York Climate Week:

1. Policy forecasts

An in-depth research paper that outlines and justifies the forecast of what policies we expect to see, where they will likely come into effect, and when. Through a detailed, probabilistic and realistic assessment of international policy developments, it shows that there are eight key policy levers that will likely disrupt markets by 2025.

2. Business mandate

A unique meta-analysis of public corporate support for the transition. It shows that over US$39 trillion of public companies by market capitalisation, representing 72% of the MSCI World Index, have publicly expressed support for the climate transition and/or are taking related action. This public support plays an important part of “why” a policy response to climate change is likely to emerge within the near term, by giving an economic and market mandate to policy makers for more ambitious action. 

We will also be releasing a discussion paper on the just transition from Grantham at the London School of Economics, and an analysis of tipping points in renewable energy markets from Carbon Tracker.

You will be able to find copies here:

What is the Inevitable Policy Response?

https://www.unpri.org/what-is-ipr

The trillion dollar energy windfall

https://www.unpri.org/the-trillion-dollar-windfall

Why a just transition is crucial for effective climate action

https://www.unpri.org/ipr-and-just-transition

Business and Investor public support for Climate Transition Policy: creating a mandate for action

https://www.unpri.org/ipr-business-mandate

The Inevitable Policy Response: Policy Forecasts

https://www.unpri.org/ipr-policy-forecas‎ts

 

 

 

This blog is written by PRI staff members and guest contributors. Our goal is to contribute to the broader debate around topical issues and to help showcase some of our research and other work that we undertake in support of our signatories.

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