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Could climate change reshape the world of finance?

On 14th January 2019, BlackRock, a U.S global investment management corporation and the world’s largest asset manager, publish an impactful letter on how climate change will reshape the world of finance profoundly. Larry Rink, the chairman and CEO of BlackRock, believes that climate change will profoundly affect the world “sooner than most anticipate.”

The world’s financial markets have yet to begin to worry about climate change as, for most, it seems to be the worry of future generations. But in Mr. Fink’s opinion, the reallocation of capital due to the impact of climate change will come much sooner. Due to this, in his annual letter his clients, Larry Fink mentioned that BlackRock will focus on sustainable investing and that by mid-2020, BlackRock will sell more than 25% of its shares from companies that obtain their revenue from thermal coal production.

 “Climate change has become a defining factor in companies’ long-term prospects … But awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance.”

According to Mr. Fink, climate change is the worry of many of his clients around the world. The effects of climate change could lead to devastating changes to the modern world we know, but how will it affect investors? Perhaps the fear of the cataclysmic change to come will reform financial markets faster than climate change will transform the world itself. Investors are worried about how climate change will impact the economy and ask what steps they should take to modify their portfolios and protect their investment.

BlackRock announced the initiatives it would take to offer more sustainable investments to their client, for example, withdrawing funds from stocks that are related to “high sustainability-related risk,” such as companies that produce thermal coal. Hydrocarbons remain the world’s most vital fossil fuel that is essential for everyday use – for example, for the production of electricity.

The goals of the Paris agreement remain fixed on moving to a low-carbon economy, but that is still a distant dream. Regardless of that, the topic is critical for the future of society, and in that way, for the future of the economy. And as the world shifts towards sustainability, it has become inevitable that companies who operate ruthlessly and without consideration for the environment will be leaving investor’s portfolios rapidly.

Furthermore, BlackRock suggested that it will introduce sustainable investment strategies to its clients, such as:

  • Expanding their options of environmental, social, and corporate governance (ESG) EFTs. These are securities baskets that include stocks, bonds, commodities and futures contracts of public companies that practice environmentally friendly business.
  • Step back from a large amount of business that they have with thermal coal producers. Many global leaders scrutinize the global energy business and believe that its impact on both social, environmental, and economic sectors will be negative.
  • Transparency – it is vital for investors to see and understand the sustainability risks of their investments.

BlackRock was not the only finance giant to suggest that climate change will create an upheaval in financial markets. McKinsey & Company, an American management consulting firm, has published similar insights on their concerns about the effects of climate change on the world economy. McKinsey Global Institute director, Jonathan Woetzel, compared the adaption to fear of climate change to the growth in information technology:

“Much as thinking about information systems and cyber-risks has become integrated into corporate and public-sector decision making, climate change and its resulting risks will also need to feature as a major factor in decisions.”

McKinsey’s report focused on how climate change could impact socioeconomic systems across the world in the next thirty years. The report suggests that climate change will be systematic and regressive, with the poorest communities being the most vulnerable. The study also emphasizes that human civilization is highly unprepared in managing the physical effects of climate change. Increased temperatures are bound to affect food production, infrastructure, natural capital, and the ability of humans to function as they do today.

Financial markets face a perplexing future, with no one being truly able to identify the consequences of capital allocation. In the past, the effects of catastrophic weather anomalies have caused devastating financial losses. According to McKinsey, by 2050, the impact of global climate change could be substantial in countries with lower GDP per capita, such as India and Pakistan.

Generation Z climate change activists like Greta Thunberg have often been scrutinized in both the media and by political leaders for loudly voicing their fear of the future of the planet. However, with big investors joining the fight for a greener world, perhaps Greta’s words will be heard more clearly. Shareholders in charge of assets worth trillions of dollars are in the position to pressure large natural resource organizations to follow the Paris climate change agreement, such as the oil giant BP for example. After all, investors are not only worried about the death of planet Earth, but for the long-term existence of their investments.

NGO organization Climate Action 100+ was launched in 2017 to “ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change.” Currently, the group has over 370 investors that collectively have over $35 trillion in financial assets. The organization aims to encourage large companies to exercise sustainable business practices. Various organizations that are systematically considered greenhouse gas emitters have joined the group, such as Chevron, BP Exxon Mobile, Ford, Lukoil, Nestlé, etc.

But despite their commitment to the NGO, organizations like BP still plan to devote over $10 billion of their annual capital expenditure on oil and gas extractions. Their investment in climate-friendly energy businesses like solar energy and biofuels is only $500 million. BP is unceasingly criticized for not being aligned with the Paris Agreement.

The effects of climate change on the 21st-century economy has become a significant global affair; however, many skeptics believe this is not more but speculations and that there is no actual threat. Only time will define the implications of climate change in society, demographics, and of course, the economy. 

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