Climate change is emerging as a major systemic issue facing investors. Economic damage from extreme weather and shifting climatic belts is expected to get worse, and governments are unlikely to sit on the sidelines.
Investors should no longer categorize the climate change issue as uncertainty, that is, an issue whose impacts can't be quantified. Rather it should be categorized as a risk, in which impacts, particularly of government intervention, can be estimated. This move would facilitate development of a coherent, flexible investment strategy.
Investors need to act now, developing a coherent, flexible strategy to manage the risk of intervention.
The “unburnable carbon” issue — that burning a significant fraction of fossil fuel reserves would trigger unsustainable atmospheric warming and so it must stay in the ground — has become polarized. Those advocating full divestment are seen by many as extreme, particularly as divestment entails the willful avoidance of dividend streams and a risk of underperformance if energy prices rise. However, recent statements from fossil fuel exploration and production companies challenging the analysis behind so-called stranded asset risk have been less than persuasive.
Asset owners increasingly are frustrated, particularly if faced with rising stakeholder pressure to reduce exposure to fossil fuels. Although there have been a few high-profile announcements of wholesale divestment, for the vast majority, the default response is to do nothing and wait for further developments.