Report: Climate inaction from energy and automotive firms to rack up costs of $150bn each year
Businesses in the coal, oil and gas, power generation and automotive sectors are failing to plan for an orderly net-zero transition, posing a sizeable risk to financial markets, a new report is warning.
Published this week by thinktank the 2 Degrees Investing Initiative and the University of Oxford’s sustainable finance group, the report analysed the ways in which 598 publicly listed firms in these sectors are planning to decarbonise and improve climate adaptation.
The gap between what is required by improving climate-related legislation and by climate science, and what the companies are planning, was then assessed in terms of risk. The report takes into account credit risk as well as physical and transition-related changes. Analysis was undertaken on an asset-level basis.
According to the report, even if companies were to align with the necessary levels of adaptation and decarbonisation by 2026, the transition would likely be disorderly, racking up costs of $2.2trn for the financial sector through to 2035.
But, for every year the transition is delayed, additional annual costs of $150bn are forecast by 2025, across all four sectors.
By 2035, the additional annual costs across all four sectors would reach more than $1.3trn if no action is taken. The bulk of this – $800m – would sit within the oil and gas sector.
The fact that the additional cost increases in a non-linear manner over time, the report states, highlights the need for rapid and joined-up action.
“While governments and financial institutions are delaying climate action over the allegedly prohibitive costs, this report underscores the bill that awaits us if we don’t act now,” said the 2 Degrees Investing Initiative’s executive director Jakob Thomae.
Climate risk assessments
The report urges financial institutions to assess their portfolio exposure to firms most at risk from the net-zero transition and to adjust their plans for engagement and divestment accordingly. It also emphasises the importance of finance firms undertaking bottom-up stress tests, so they can analyse which firms or even assets are the worst-performing.
The UK Government recently confirmed that, from April 2022, more than 1,300 of the largest UK-registered companies and financial institutions will have to disclose climate-related financial information on a mandatory basis – in line with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD).
This mandate will then be expanded to smaller firms through to 2025. Outside of the UK, all G7 nations have pledged to adopt TCFD requirements by this point.
A key element of the TCFD framework is scenario analysis – assessing the risks to one’s portfolio at a range of warming trajectories, including the Paris Agreement’s pathways.
On a voluntary basis, organisations with a combined market capitalisation of $25.1trn (£18.3trn) have voiced their support for the TCFD. As has always been the case, voicing support does not mean full alignment.