Climate change could cut asset values by more than half

The costs of acting sooner are much lower than those of delaying action, Willis Towers Watson found

The financial fallout of climate change could cut the value of existing assets anywhere from 15% to 60%, depending on the extent of global warming.

And in short, the financial services industry is failing to do nearly enough, despite a dramatic rise in net-zero pledges.

That is according to a report this month from Willis Towers Watson’s Thinking Ahead Institute, which laid out the range of physical and financial risks associated with average temperature rises of 1.8⁰C to 3.6⁰C.

The role of the financial services industry in helping address climate change is critical, with needs to make new investments and engage with portfolio companies to alter their capital allocation decisions, according to the report, entitled “Pay Now or Pay Later.”

“If the industry acts now there will be costs, but these will be materially less than those arising from a late transition or no transition at all,” the paper read. “If climate tipping points, that could magnify the costs of inaction, are considered we could see a 50-60% downside to existing financial assets in a business-as-usual scenario where climate risks are not addressed.”

Currently, climate change has resulted in average temperature increases of 1.2⁰C, which is associated with more extreme weather events, damage to coral reefs, drought and threats to biodiversity. Under the most optimistic assumptions, average temperatures will go up by at least 1.8⁰C by the end of the century, with the 1.5⁰C goal of the Paris Agreement no longer seen as possible, the report noted.

“It is possible for the investment industry to influence the pace of the transition by appropriately repricing assets to reflect a well-below 2°C world,” it stated. “One approach to do so is to consider the potential change in asset prices in the market as it moves to factor the policy, regulatory, technological, consumer and other shifts that are required.”

Progress by some, not others

About half of all companies in the S&P 500 have lobbied for policies consistent with the Paris Agreement, according to a separate report from Ceres. However, most – 93% – of companies in the index have publicly recognized physical risks and transition risks that would affect their business.

“Many companies are not supporting policies that would protect their own corporate interests,” noted the Ceres report, “Responsible Policy Engagement Analysis 2022.” The finds also lag “the 65% of companies that have acknowledged the need for Paris-aligned climate policies, meaning many companies are not actively advocating for the very policies they say the US needs.”

Just over one in 10 of the biggest US companies voiced support for the Inflation Reduction Act, the biggest climate-related legislation in the country’s history.

Further, 29% of S&P 500 companies recently lobbied against Paris-aligned climate policies, even though some of the same businesses lobbied for other Paris-friendly policies, Ceres noted.

And echoing a problem that has been widely reported regarding US politics, big business has failed to take their trade groups to task for lobbying against causes the companies have championed.

“While the vast majority of S&P 100 companies are members of organizations like the US Chamber of Commerce and the Business Roundtable, only 8% have publicly assessed those organizations’ climate policies,” the report stated. “Even fewer have publicly acknowledged the organizations’ history of obstruction (5%) or disclosed that they have taken action to try to change their trade groups’ positions (3%).”