If it reaches 4° or more, global warming may cause severe economic damage with the consequence that a significant portion of the value of a diversified equity investment portfolio will be placed at risk. Institutional investors who become forceful stewards can alter this trajectory.
In this Part 1 we analyse portfolio risk arising from climate change. We estimate that in a plausible worst case for climate damage the value at risk in 2030 may be equivalent to a permanent reduction of between 5% and 20% in portfolio value compared to what it would have been without warming. This risk can be substantially lowered by a rapid energy transition to reduce greenhouse gas emissions.
In the accompanying Part 2 we explore the actions investors should take to reduce risk. Long-term investors should consider doing whatever they reasonably can to bring a rapid energy transition about and investment fiduciaries may have an obligation to do so. Possible action includes voting for resolutions to change constructively the business strategies of the companies in which they are invested, particularly the fossil fuel companies. The resulting collective action problem may be solved if pension scheme members and other beneficiaries test legally the obligations of their investment fiduciaries in this regard. We call this assertive approach by investors to taking action to reduce climate risk ‘Forceful Stewardship’.