Investors and portfolio managers ought to brace themselves for an unexpectedly potent impact of climate change on their stock holdings.
Norway's Oil Fund Warns of Climate Change Impact on Investments
In a concerning development, Norway's sovereign wealth fund, Norges Bank Investment Management (NBIM), has issued a warning about the potential loss of one fifth of the fund due to climate change. This warning comes in light of new research indicating severe impacts on equity valuation, with more downside than upside risk.
Sondre Hansmark, senior adviser at Norwegian think tank Langsikt, is sceptical that the new modelling will make much difference at NBIM, which is bound by a mandate from the Norwegian parliament that focuses on maximizing returns. Hansmark notes that the fund lacks a coherent strategy for fulfilling its pledge to the Paris Agreement and its investments, which are still heavily invested in fossil fuels.
NBIM's warning is based on a forecast for higher losses than MSCI's model, which predicts a fall of only 4% in NBIM's equity portfolio even with warming of almost 5°C. EDHEC, a French business school, considers this prediction to fail the "laugh test". Climate disasters could already dent global economic growth by up to 3% within the next five years, according to new NGFS short-term scenarios.
The NGFS, a network of central banks and supervisors, predicted that global GDP could fall 30% by 2100 under current policies, with tail risks for a decline of up to 50%. Some countries could see their economies shrink by a quarter as soon as 2050 from chronic climate risk.
Amy Owens, capital markets policy analyst for Carbon Tracker, expressed encouragement that NBIM is highlighting the flaws of the MSCI model. Owens' report in 2023 states that the increasing use of climate scenarios by investors which ignore, downplay or defer looming climate risks creates a false sense of security in the minds of those deploying capital.
Despite these concerns, NBIM is working to encourage the companies it invests in to align their operations with the goals of the Paris Agreement. Alasdair Doherty, sustainable finance analyst from the Institute for Energy Economics and Financial Analysis, noted a disconnect between what's being done on the GDP and economic side and what's been done on the asset management side. He emphasized the need for a more holistic approach to climate risk management.
Investors are increasingly aware of the long-term risks and opportunities posed by climate change. As such, efforts are being made to develop and improve climate risk models to better capture the complexity and uncertainty of climate risks. Some investors also employ additional strategies, such as stress-tests and scenario analyses, to evaluate the resilience of their portfolios.
