This investor dashboard visualizes progress (or lack thereof) on climate risks

Schroeders

Schroders has become the latest high-profile investment firm to warn the global economy faces catastrophic risks unless urgent action is taken to tackle climate change.

The asset management giant, which manages $520 billion of assets globally, this week launched a new "dashboard" designed to help investors better understand complex climate-related investment risks, arguing that without urgent action the world was "accelerating towards a cliff edge."

The dashboard was accompanied by a briefing paper which contained a series of stark warnings over the growing impact of climate change on investment returns and the huge threat to globally economic stability that could escalate over the course of the century.

"Climate change will be a defining driver of the global economy, society and financial markets over coming years, decades and beyond," wrote report author Andrew Howard, head of sustainable investment at the company. "Whether the global economy is rebuilt on less carbon intensive foundations or the temperature continues to escalate, investors will be unable to avoid its impacts."

The report warns that global GDP could be curbed by between 2 percent and 50 percent, depending on whether the world can keep temperature increases below 2 degrees Celsius or see them spiral to 6C above pre-industrial levels. It calculates that on current trends the world will see temperatures rise to 4.1C above pre-industrial levels — smashing the 2C goal set by the Paris Agreement and putting the global economy on track for GDP losses of around 10 percent.

Disruptive impacts

The firm warned that "disruptive impacts" from climate change will become a bigger influence on corporate valuations over the coming decades, adding that cash earnings for global companies are likely to be affected whatever temperature trajectory the world embarks on.

It also argued that the "carbon budget" for staying below 2 degrees C of warming will be burned through within three decades based on current trends. "Climate change is not a future possibility; it is well underway," the report stated.

The report acknowledges that action to tackle climate change is accelerating, but notes that this too will bring challenges for investors and businesses. "This gloomy picture is tempered by the renewed interest most global leaders are showing in addressing the challenge, albeit slowly and belatedly," the report argued. "Major changes lie ahead if their ambitions are to prove close to being realistic. Emissions cuts on the scale needed have implications for every corner of economies and markets, not just those most obviously exposed."

Echoing the increasingly influential "carbon bubble" hypothesis, which argues investors could be left with stranded assets if the transition to a low carbon economy gathers pace and marginalizes fossil fuel assets, Howard warned "the shift to a widespread recognition that the competitive landscape in many industries will be reshaped is unlikely to be smooth."

"Investors who are unprepared or who have relied on overly simplistic analysis risk losses and missed opportunities," the report added. "This is why gauging the timing and depth of market discounts for climate impacts is as important as analyzing their effect."

Schroders stated its new Climate Progress Dashboard would help investors track the pace at which industries are shifting towards lower carbon business models.

The toolkit assesses decarbonization progress across 12 key metrics, including political action, public concern, climate finance, corporate planning, renewables deployment and fossil fuel production.

It concludes that the well-documented challenges faced by the coal industry and the success of renewables in recent years mean the two metrics are on track for delivering 2.2C and 3.1C of warming respectively — still above the 2C goal, but well below the average for all indicators.

In contrast, the dashboard warns that current oil and gas production trends are in line with a 7.8C warming trajectory, while slow progress on carbon capture and storage technology threatens 5C of warming.

"The dashboard brings together perspectives from different angles: politics; business; finance; technology; and fossil fuel industries," Howard explained. "An all-round view is important. No single measure on its own is a sufficient barometer of progress: reshaping the global economy as a carbon-light version of itself will require a range of markets to expand or contract rapidly in coming decades. What this means is that plotting progress across different markets provides a more rounded picture than any one in isolation. Oil producers may insist limiting temperature rises to 2C is impossibly optimistic, whereas electric car manufacturers are already on a road that will take them closer to that outcome."

The report and dashboard are the latest in a series of moves from leading investors to address climate and carbon bubble risks, which look set to continue to crank up pressure on listed firms to come forward with credible plans for managing the climate risks they face.

The report came the same day as the Climate Disclosure Standards Board launched a new initiative to help firms report on climate-related risks in line with the new international guidelines put forward by the Financial Stability Board's Task Force on Climate-related Financial Disclosures (TCFD).

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