Investors Urged to Pay Transition Costs Now to Save More Later

New research has priced the financial implications for investors’ assets in different climate scenarios. 

Investors must bear the costs of mitigating the climate crisis sooner rather than later if they are to avoid steeper financial downsides in the future.  

New research published by not-for-profit investment research group the Thinking Ahead Institute (TAI) has calculated the economic costs and physical impact risks of climate change on financial assets across different temperature scenarios.  

It found that investors could face a 50-60% downside to their existing financial assets if global temperatures increase by between 2.7°C to 3.6°C by 2050. In comparison, investing in the transition and limiting global warming to well below 2°C will restrict losses to around 15%, the report said.  

“Climate timeframes now overlap with investment timeframes,” said Isabella Martin, Senior Associate at the TAI. “Not acting might appear the cheaper option in the short term, but over a horizon that is completely normal for investment funds, inaction is in fact the far more expensive choice.” 

The report added that it’s possible for the investment industry to influence the pace of the global climate transition by “appropriately repricing assets to reflect a well-below 2°C world”. Investors need to consider the potential changes in asset prices according to sustainability-focused policy, regulatory and technological shifts, which can be expressed as a percentage change to current asset prices in net present value (NPV) terms, it said. 

The TAI analysis also underlined the importance of ambitious and fast-moving policy to ensure the world stays on track for a well-below 2°C temperature pathway.  

The TAI refers to investment consultancy firm WTW’s Climate Transition Value at Risk (CTVaR) model, which measures how a company’s value will change if market expectations shift from a ‘business as usual’ mentality to fully embracing the climate transition. The CTVaR has estimated losses for global equity in a well-below 2°C scenario sit at -3%, meaning that the overall cost to current financial assets of transitioning the economy is around a 3% permanent reduction in equity values.  

“The potential cost to financial assets of climate inaction meaningfully exceeds the anticipated costs of taking action to drive an organised climate transition,” the TAI report said.  

“Additionally, delaying action will lead to the cost of inaction increasing as this increases both the likelihood and magnitude of higher temperature scenarios, as well as the occurrence of the more severe physical risk outcomes becoming closer as time passes.” 

Preparing for change 

Beyond the financial incentives, there are environmental and social benefits to acting investing in the transition now rather than later, the report said, such as contributing more positively to overall health and wellbeing, limiting population displacement, and protecting biodiversity.  

Previous research by the TAI has highlighted the short-term challenges asset owners are contending with, which are taking resources and focus away from addressing longer term sustainability challenges, such as the cost-of-living, food, health and energy crises. 

In February, the TAI’s Co-Founder Roger Urwin urged pension funds to put their net zero plans into action to meet their 2030 decarbonisation targets, noting that many of these plans are not yet “fit for purpose”.  

The largest pension markets manage US$56.58 trillion in assets, a separate TAI report said, indicating the potential impact if pension funds price future climate risks accordingly and upscale their investments in solutions and transitioning assets.  

To identify which assets are at most risk from climate change, investors are already seeking assurances from investee that companies have credible transition plans in place. New guidance on corporate transition plans has been recently published by the Glasgow Financial Alliance for Net Zero (GFANZ) and the UK’s Transition Plan Taskforce. 

“[The TAI] findings should help investors understand that without significant efforts now to transition to a sustainable economic model, the associated physical risks driven by continuing emissions and climate change will potentially lead to major changes in global GDP and income levels in the coming century,” said Tim Hodgson, Co-Head of the TAI. 

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