Alarm bells are ringing for investors on climate

{"text":[[{"start":6.36,"text":"The writer is the publisher of the Wealth of Nations newsletter"}],[{"start":10.28,"text":"Many investors have taken a sceptical view of ESG investing in the past few years, and governments have been scrambling to retreat from climate commitments — particularly now there is a climate-change denier back in the White House. But if this summer’s extreme weather in Europe has served any useful purpose amid the death and destruction, it should be to force a rethink."}],[{"start":31.92,"text":"The damage wrought by the wildfires that have engulfed parts of France, Spain and Greece will probably be huge — as much as €3bn according to an FT analysis. Nor is it unusual. The European Environment Agency reckons that between 1980 and 2024 extreme weather events, including floods, storms and droughts, caused €822bn of damage, a quarter of it in the past four years alone. And that is only the direct cost. The indirect costs include higher inflation, not least through food prices and disruption to supply chains; weaker productivity as working time is lost and infrastructure damaged; and stranded assets as businesses close and regions depopulate."}],[{"start":76.24,"text":"What should worry investors is the effect these events may have on the finances of highly indebted sovereigns as they grow more frequent. During the Eurozone debt crisis, markets rightly feared a sovereign-bank doom loop. As the Brussels-based think-tank Bruegel warned in a recent report, the danger now is an emerging climate-sovereign doom loop. Rising climate costs erode sovereign creditworthiness, which in turn limits the fiscal capacity to spend on adaptation and mitigation, leading to still larger costs in future."}],[{"start":106.48,"text":"These are neither trivial nor distant concerns. EU member states are collectively spending just €29bn a year on climate adaptation and mitigation, compared with the €70bn annually that the European Commission has estimated they need to spend between now and 2050. According to a recent study by the World Resources Institute, every euro spent on adaptation is estimated to save €10 of future damage. Meanwhile, in a heat-stress scenario in which each country’s hottest recent years are replayed over the remainder of the decade, Europe’s most exposed economies could suffer an aggregate loss of between 5 and 7 per cent of GDP, reckons the insurer Allianz. France alone could be hit by about €210bn of costs by 2030, adding 2.2 per cent of GDP to its deficit."}],[{"start":154.96,"text":"Already there is a clear link between higher physical climate risk and higher sovereign borrowing costs even after factoring in standard macro-debt variables, notes Michael Penn, a climate analyst at Absolute Strategy Research."}],[{"start":168.26,"text":"He estimates that as many as 60 countries could face climate-related downgrades by 2030, with the most vulnerable to default risk including Egypt, Pakistan and Nigeria. Conversely, some countries could see climate-related improvements in their ratings, whether because, like Chile, they have strong renewables potential or, like Argentina, have abundant resources needed for the transition."}],[{"start":191.8,"text":"Europe, though, is particularly exposed, Penn notes — not just because its banks tend to be large holders of sovereign debt, but because they increasingly hold diversified portfolios of other member states’ bonds. This raises the risk of contagion should climate stress trigger a financial crisis in any one country. Little wonder the European Central Bank has been flagging these risks for years, urging governments to work with the private sector to widen climate insurance. With about 20 per cent of losses currently insured, falling to as low as 1 per cent in Romania, the rest is more likely to end up on the sovereign balance sheet, the state serving as insurer of last resort."}],[{"start":230.88,"text":"But while the European institutions are showing some welcome vigilance, the same cannot be said of the US. That is especially troubling because, as David Owen of Saltmarsh Economics has noted, America may be even more vulnerable than Europe. The Saltmarsh Economics Climate Index, established over a decade ago, shows the US scoring worse on both emissions and the estimated economic costs of climate-related disasters. Indeed, the latter are averaging about 0.5 per cent of GDP in the US, more than double that of Europe — with much of that risk concentrated in a handful of states."}],[{"start":267.02,"text":"This is precisely the sort of thing US regulators ought to be tracking closely. That they no longer do makes it all the more important that investors pay attention themselves — ready for the day when an extreme weather event triggers an extreme market event."}],[{"start":null,"text":""}],[{"start":null,"text":""}],[{"start":284.57,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1786611887_9586.mp3"}