The idea that trillions of dollars of ports, coal mines, oil deposits and more might be rendered worthless by efforts to address climate change certainly isn’t new. Concerns had been mounting for years before Mark Carney, then governor of the Bank of England, drew attention in 2015 to the risks that “stranded assets” might pose to the financial system. The more the world invested in foresight, he said, the less would be regretted in hindsight.
Six years on, too little has been done. The approaching COP26 climate talks have a broader agenda, but the danger that action on climate change might cause financial and economic instability shouldn’t be sidelined.
Granted, there’s been some progress since Carney’s intervention. More companies are trying to measure their emissions, set targets for abatement, and monitor their climate-endangered assets. A climate disclosure task force (chaired by Bloomberg LP founder Michael Bloomberg) has helped shed light by improving financial reporting. Investors are asking more questions. Economists have been studying the threat to financial stability.
Even so, too little is known to adequately quantify the risks. Moody’s says that financial firms across the world’s largest economies have $22 trillion of loans and investments that will be affected by the transition away from carbon — but shocks will reverberate far beyond finance. It’s still unclear how companies are planning for this, if they are.
Meanwhile, billions of dollars are still being invested in projects that won’t be economically viable if governments implement the Paris Agreement to limit global warming. The International Energy Agency said in May that averting a climate crisis would require new oil and gas projects to cease immediately, along with new coal-fired plants that don’t capture their emissions. Yet exploration continues even in high-cost areas such as the Barents Sea. Carbon Tracker, a think tank, says that existing projects are sufficient for future liquefied natural gas trade in a scenario that keeps warming to 1.5 degrees Celsius. Approved supply exceeds demand by some 25%, leaving even greenlighted projects at risk.
Governments need to redouble their efforts to understand what is at risk, and not just for energy producers. They should press for still greater transparency and better financial reporting — looking beyond current emissions and taking account of broader financial and economic risks. They should help shareholders and bondholders make their own appraisals by ensuring, for example, that investors can see the carbon prices and regulatory assumptions built into the companies’ projections.
Policy makers should also help corporate planners by committing themselves to clear transition pathways, projected carbon prices and steps to discourage gaming of the rules. (Among other things, that means no compensation for investors that gamble on “business as usual” and lose the bet.) Financial systems can take orderly, expected shifts in stride, and companies will adapt; uncertainty is a formula for financial instability.
Finally, the transition will impose costs on producer countries — many of them low- or middle-income, unable to bear the cost of stranded assets or the loss in future revenues if they cut their output. They’ll need support from the advanced economies in the form of subsidies to keep resources in the ground. A deal to support South Africa’s transition out of coal has been under discussion. That could provide a model, and would be a good start.
Faster progress is essential — both in mitigating climate change and in managing the consequences of stranded assets. It isn’t enough for the governments attending COP26 to say all this. They need to act.
Editorials are written by the Bloomberg Opinion editorial board.
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