Climate change could cause the next financial crisis

Anna Triponel

January 27, 2020

The Bank for International Settlements, which represents all central banks, said climate change could cause the next financial crisis. The bank further noted that central bankers at present lack tools to deal with what could be one of the biggest economic dislocations of all time.

“Climate change poses unprecedented challenges to human societies, and our community of central banks and supervisors cannot consider itself immune to the risks ahead of us.“                      

François Villeroy de Galhau (governor of the Banque de France), The green swan: Central banking and financial stability in the age of climate change (Bank for International Settlements, January 2020)

According to data provider Morningstar, a record €120bn was invested in sustainable funds, more than double the amount in 2018 (€48.8bn). Responding to client demand, an increasing number of asset managers are converting products into sustainable funds, and creating new funds. These funds integrate environmental, social and governance standards into their portfolios, pursue sustainability-related themes, or provide sustainability metrics alongside financial returns.

“Sustainable solutions are more attractive than ever and demand across Europe is increasing rapidly.“                      

Jan Erik Saugestad, Chief Executive, Storebrand Asset Management, Europeans make record investments in sustainable funds (Financial Times, January 2020)

Brunel Pension Partnership, a £30bn British pension fund which manages pension money for councils in south-west England and the Environment Agency, has adopted a new policy stating that it would “review the mandates of asset managers that don’t reduce exposure to climate risk by 2022.” Asset managers affected include Aberdeen Standard, Invesco, Legal & General Investment Management, Royal London Asset Management and Wellington Management. The Guardian reports the following issues amongst asset managers, identified by Brunel: short-termist thinking, unwillingness to invest in companies pursuing low-carbon technologies, and risk models that rely on flawed assumptions and fail to integrate climate risks.

“Climate change is a rapidly escalating investment issue. We found that the finance sector is part of the problem, when it could and should be part of the solution for addressing climate change.“                      

Mark Mansley, Chief Investment Officer, Brunel Pensions Partnership, £30bn pension fund: we’ll sack asset managers that ignore climate crisis (The Guardian, 27 January 2020)

The Church of England Pension Board (which oversees the £2.8bn pensions for the Anglican clergy) has launched the first passive index on the London Stock Exchange that enables passive funds to invest in companies aligned to the Paris Agreement. The FTSE TPI Climate Transition Index was developed in collaboration with FTSE Russell. The Church of England will invest an initial £600m in the index.

David Cumming from Aviva Investors urges asset managers to adopt a more radical approach in the face of climate change. David provides guidance on engagement, internal structures that are needed within asset managers, and communication.

“Climate change has changed everything. Investment objectives have to include responsible values and actions, in addition to financial returns. We have to respond by engaging in a different way and by taking decisive action when the companies we invest in don’t. We cannot be passive in the face of climate change. We have to be active.“                      

David Cumming, Chief Investment Officer for equities, Aviva Investors, Why asset managers cannot be passive on climate change (FT Opinion, 30 January 2020)

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