LONDON: With profound implications for the global shipping industry, governor of the Bank of England Mark Carney has acknowledged that restricting the rise in global temperatures to two degrees above pre-industrial levels would require up to 33 percent of the world's proven reserves of oil and gas to remain unused.
The subsequent permanent loss of income to bulk carrier operators would also mean "potentially huge" exposure to UK investors as 19 percent of FTSE 100 companies are in natural resource and extraction sectors, and a further 11 percent are in power utilities, chemicals, construction and industrial goods sectors.
Currently, the two investment tiers account for a third of equity and fixed income assets.
"Our societies face a series of profound environmental and social challenges. The combination of the weight of scientific evidence and the dynamics of the financial system suggest that, in the fullness of time, climate change will threaten financial resilience and longer-term prosperity," said Carney, adding that while there is still time to act "the window of opportunity is finite and shrinking".
Speaking to a group of insurance underwriters, Carney pointed out that many of the [climate] changes since the 1950s are without precedent: "Research tells us with a high degree of confidence that in the Northern Hemisphere the last 30 years have been the warmest since Anglo-Saxon times; indeed, eight of the ten warmest years on record in the UK have occurred since 2002; atmospheric concentrations of greenhouse gases are at levels not seen in 800,000 years; and the rate of sea level rise is quicker now than at any time over the last two millennia."
Inflation-adjusted insurance losses from climate change have increased from US$10 billion a year in the 1980s to around US$50bn over the past decade. Lloyd's of London estimates that the 20cm rise in sea level at the tip of Manhattan since the 1950s increased insured losses from Superstorm Sandy by 30 percent in New York alone.
The UK insurance sector manages almost £2 trillion in assets to match liabilities that often span decades. Carney explained that while a specific flood or storm might not directly affect a company's bond value, policy action to promote the transition towards a low-carbon economy could spark a fundamental reassessment.
"Financing the de-carbonization of our economy is a major opportunity for insurers as long-term investors. It implies a sweeping reallocation of resources and a technological revolution, with investment in long-term infrastructure assets at roughly quadruple the present rate. For this to happen, 'green' finance cannot conceivably remain a niche interest over the medium term," he added.
Echoing Carney's comments Bank of America, Citi, JPMorgan Chase, Morgan Stanley, Wells Fargo and Goldman Sachs said in a joint statement that they want governments to reach a strong global climate agreement in December in order to migrate to a low-carbon economy.
"Policy frameworks that recognize the costs of carbon are among many important instruments needed to provide greater market certainty, accelerate investment, drive innovation in low carbon energy, and create jobs," said the banks.
"Over the next 15 years, an estimated US$90 trillion will need to be invested in urban infrastructure and energy. The right policy frameworks can help unlock the incremental public and private capital needed to ensure this infrastructure is sustainable and resilient," they declared.
Carney added that with better information, insurers and investors could indeed "build a virtuous circle of better understanding of tomorrow's risks, better pricing for investors, better decisions by policymakers, and a smoother transition to a lower-carbon economy".