The insufficiency of government action to achieve the Paris Agreement commitments is self-evident. Yet Redburn is right to argue that the likelihood of further government action on climate change is being significantly underpriced (“Redburn says Big Oil no longer a ‘buy’ as peak demand looms”, September 9). Indeed, as time ticks on without effective intervention, the pressure to drive greater policy action will only build further and further.
We foresee an inevitable policy response by 2025 that will be forceful, abrupt and disorderly because of the delay. This will create considerably greater disruption than many investors and businesses are prepared for today. The implications of this mispricing go far beyond the energy sector, rippling throughout the economy, exposing many of the Principles of Responsible Investment’s 2,600 investor signatories to significant risk.
A large part of the problem is that markets today lack a robust basis for pricing climate transition risk accurately, and that is making them overly reliant on unrealistic policy outlooks such as the International Energy Agency’s New Policy Scenario. Which, despite its name, assumes the world will glide towards 3C without any further climate policy action beyond that which has already been announced. Given the human suffering this would result in, that is a highly unrealistic scenario. Yet, either implicitly or explicitly, many of the world’s companies, governments, banks and investors are using it as their base-case — justifying these bullish views on oil demand and other business as usual investment decisions.
The climate scenarios and stress tests available to markets are valuable but only provide part of the picture. To enhance portfolio resilience and inform strategic asset allocation investors need more than just hypotheticals — they need to know what is the most likely in the near term.
The PRI has commissioned a major new forecast to model the “Inevitable Policy Response”. It aims to fundamentally reset investors’ forward-looking policy assumptions. Unlike other climate scenarios that are reverse-engineered from a predefined temperature goal, the forecast policy scenario “works up” from a detailed and realistic assessment of policy and technology developments given the world as it is today. The questions this work raises will be front of mind this week when we release the policy forecasts at our annual conference in Paris before more than 1,700 investors and 100 expert speakers.
Our message to delegates representing $84tn of investment will be clear: it’s time to get real about policy risks coming down the line — investors must act now to protect and enhance value.
Chief Executive Officer, The Principles of Responsible Investment, London E1, UK
Get real time update about this post categories directly on your device, subscribe now.