UK-based investment manager Howard Covington, environmental lawyer and ClientEarth chief executive James Thornton, and climate economist Cameron Hepburn have all this week claimed that international investors now have a ‘duty of care’ to preserve stock value while reducing emissions.

Covington, who is also a trustee of ClientEarth, said: “Clients of investment firms and beneficiaries of pension funds might have a legal case to bring if those who manage money for them stand idly by as emissions erode the value of their stock.

“Investors will play a major part in reducing future emissions, either voluntarily or because they will eventually be forced by the courts to manage climate risk.”

ClientEarth claims that the largest 500 companies floated on the world’s stock markets now account for around 50% of the entire market value and 14% of global emissions. Utilities firm RWE and oil guzzler ExxonMobil – which are both making cautious moves in the low-carbon market – are among the top ten.

A failure to act on systemic climate risk could reduce the value of investment portfolios by as much as 10%. This would create a potential $7trn loss on the shares on the world’s equity markets, ClientEarth says.

In an article published in the Nature journal, the investors point out that bringing investors to court would be complex, but ultimately successful.

ClientEarth’s Thornton said: “To produce a wholesale change in attitude, a court ruling on the obligations of fiduciary investors to control systemic climate risk will probably be needed.

“Because of the uncertainties in estimating future climate damage, this will not be an easy case to bring. But we anticipate that such a case will ultimately succeed.”

Hepburn, a professor of environmental economics at the Smith School within the University of Oxford, added: “The risk exceeds the legal test of materiality and should be too large to ignore. In practice most investors neglect it entirely. Investors should actively encourage the companies they own to disclose their business strategy for a net zero emissions world.”

Sudden transition

The warning falls on the same day that the European Systemic Risk Board published its ‘Too late, too sudden: Transition to a low-carbon economy and systemic risk’ report.

The report offers scenarios as to how banks and investors could test their portfolios against climate risk. The report states that a sudden transition away from fossil-fuel energy could harm GDP, as alternative sources of energy would be restricted in supply and more expensive to deploy.

To combat this the report recommends increasing the availability of granular data and dedicated low-frequency stress tests in order to reveal the speed that investors should work at to introduce low-carbon portfolios.

Money talks

Numerous initiatives are already in place to help investors with the low carbon transition. Influential investors with $22trn in assets have already helped reduce global corporate emissions by 641 million tonnes through collaboration with CDP’s Carbon Action initiative.

Earlier this week, the chief executive of the world’s largest investment firm, Blackrock, called for companies to build environmental, social and governance (ESG) management into their business models, calling it a sign of ‘operational excellence’.

Matt Mace

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