Known unknowns of climate risk
If investors had a clear and uniform view of the risk to market returns from climate change then they would be motivated to implement better management practices. Their concerns as shareholders would flow on to the companies they invest in who would, in turn, be held to account for their strategic responses to climate change.
Most professional investors accept that there is a material risk to market returns, but their inability to quantify it within a reasonable confidence level is a barrier to change. A former colleague of mine often proclaimed: "If you can measure it, you can manage it." In the investment industry, the absence of measurement often leads to an absence of management, and this occurs even in situations where the risk is glaringly obvious.
Without an agreed “number” for the industry to work with, there is less chance of systemic change. However, we need to ask: Is it realistic to expect that we can neatly quantify market risk? And is it really necessary to do so? I believe the answer to both of these questions is, no.
We can’t easily quantify the risk. When assessing company prospects it is difficult to work out what is climate change risk and what isn’t. Consider the likelihood of a price on carbon: Is this considered to be climate change risk or just a standard operating risk? The possibility of a regulatory response is well known, so we could argue it is just a standard operating risk; we could also argue that it is directly attributable to climate change and classify it as climate change risk.
Also, we need to be mindful that climate change risk extends well beyond the immediate issue of carbon exposure. It spans a range of areas including infrastructure development, technology investment, health issues, insurance availability and consumer product preferences, just to name a few. The point is, it is hard to allocate risk into a category called "climate change" because it is deeply entwined with other forms of risk that companies are exposed to.
Consider BHP Billiton’s recent attempt to buy into the fertiliser industry via Potash Corporation. If it had succeeded, it would have helped buffer BHP’s exposure to carbon intensive industries. It is not clear whether the bid was a strategic reaction to climate change risk or merely a by-product of other designs, so, again, how could we have attributed the outcome of such a transaction to climate change risk or otherwise?
It is not necessary to quantify the overall risk. We don’t really need a number to work with because, for investors, it is really about managing information. Intuitively, we accept that investment decisions made with more information rather than less will, over time, produce better quality returns. So investors who, all else being equal, take the time to assess and manage climate change risk will be armed with more information and produce better returns than those who don’t.
Last year, Paul Gilding and I asserted that there is a high level of valuation risk for carbon intensive companies (refer to our “Carbon-Induced Financial Disruption” white paper). Acknowledging that there is such a significant level of risk to the market is more important than trying to quantify it in precise terms. The big picture view is more useful than the detail.
When the trustees of superannuation funds and other institutional investors address the issue of climate change, they would be wise to look ‘under the bonnet’ and focus on how their investment managers are dealing with it. A recent report by CAER and Seacliff Consulting entitled Australian Superannuation Fund Investments: A report on progress made in the implementation of ESG practices, found that the lack of quantification of risk was a barrier to change. The report recommended that fund trustees can, instead, seek greater process transparency from their investment managers. A review of their managers’ practices, including their investment policies and real life examples of decisions that resulted from attention to climate change risk, would be a more valuable exercise than attempting to refine numerical estimates of market risk.
The global financial crisis was all about investors’ belief in “numbers”. The risks posed by highly levered, structured investment products was considered too extreme by many seasoned market practitioners, including yours truly. However, there were also many highly qualified people who focused less on the macro weaknesses, pored over the numbers and found compelling investment propositions. Intuition and experience deserve to be taken seriously.
John Maynard Keynes apparently remarked that "it is better to be roughly right than precisely wrong." This quote is very relevant to climate change risk. An intuitive, proactive and practice-based response is required. Those investors who hold out for empirical evidence or tight confidence levels in the quantification of climate change risk will do so at their own peril.
Phil Preston is the Principal of Seacliff Consulting, a firm offering specialised consulting services in the financial and responsible investment fields. His prior work includes 17 years of financial research and portfolio management in the funds management industry.
Comments on this article
The Real Climate Change.
The Committee is fundamentally flawed. You must believe in man made Climate Change to be on it.
National Geographic News quoted a scientist in 2007 that, “Simultaneous warming on Earth and Mars suggests that our planet's recent climate changes have a natural—and not a human-induced—cause.” Mars’ ice caps had been diminishing for three years in a row, and the scientist, “Habibullo Abdussamatov, head of space research at St. Petersburg's Pulkovo Astronomical Observatory in Russia, says the Mars data is evidence that the current global warming on Earth is being caused by changes in the sun.” He further stated that, “changes in the sun's heat output can account for almost all the climate changes we see on both planets.” A NASA study in the same year also reported that Mars warmed since the 1970s, “similar to the warming experienced on Earth over approximately the same period,” which, they conclude, “suggests rapid changes in planetary climates are a natural phenome
Known Unknowns / known Knowns /
Let's not be like Donald Rumsfeld. Externalities and risk must be calculated - pretty simple!
Expect more frequent extreme weatherevents
Check:
Australian Parliamentary Library Website
UNEP Yearbook 2010
IPCC Report 2007
The list goes on...
Expect more frequent extreme weatherevents
Check:
Australian Parliamentary Library Website
UNEP Yearbook 2010
IPCC Report 2007
The list goes on...
I don't get it
Thanks Peter you are right about the language of the true believers....their bullying tone says more about them than it does about the subject at hand. And for Ross it would be helpful if you understoood that those who offer a contrary view also believe in climate change ....just not the way you see it. It would seem that people of your persuasion make a habit of miscontruing the written word to suit your view. Thats OK as long as you don't hold out to be last word on knowledge.Technical I may not be but fooled by twaddle I am not.
I don't get it?
I read all the posts. Why is it that the language from those who admit to be climate change believers, is so bullying, impatient and rude to those that take the opposite view, even if it is as a matter of wanting to debate in order to be convinced. Its like the PC police on steroids.
Frankly I don't care a rats who is right. Just put 20,000 MW of nukes in Australia and we can just chug along with low cost power and no carbon emissions (because the cars will be electric too).
The reason it won't happen is because State Govt make a motza from their coal based Power Genco profit, the "equivalent" tax paid to States rather than Federal Govt, plus loans acquired by Statesat AAA rating but paid by Genco at market rates. NSW and QLd being the biggest offenders, And Vic too, because although they sold the brown coal, the deal was to allow them to operate for years. All Vic did was get futre earnings ahead of time.
So, its all nukes from him, and all nukes from me..and no more angst.
The three Amigos
Well we have all three amigos here today: Peter, who enjoys supporting the fraudster scientist Ian Plimer (I remember with joy the fool he made of himself trying to debate George Monbiot on Lateline), Bill Koutalianos the failed senate candidate for the Climate Sceptics party, and Alan Robertson, who appears to have little understanding of anything remotely technical (he told us last week that it is more economical to leave an air-conditioner running during the day rather than turning it on only when you need it), yet he tries to convince us that AGW is all hogwash because, well, err, the scientists got something wrong over the last few hundred years.
All three amigos take the side of a tiny proportion of questionable scientists who claim man-made global warming (AGW) is not occurring, despite thousands of scientists and a huge collective body of research work showing with very little doubt that AGW is real, is occurring at an accelerated rate, and poses a risk to our children's future. All three should reread the content of this article on risk management in the event their belief is incorrect.
Great key points there: Also,
Great key points there:
Also, we need to be mindful that climate change risk extends well beyond the immediate issue of carbon exposure. It spans a range of areas including infrastructure development, technology investment, health issues, insurance availability and consumer product preferences, just to name a few. The point is, it is hard to allocate risk into a category called "climate change" because it is deeply entwined with other forms of risk that companies are exposed to."
"When the trustees of superannuation funds and other institutional investors address the issue of climate change, they would be wise to look ‘under the bonnet’ and focus on how their investment managers are dealing with it."
John Maynard Keynes apparently remarked that "it is better to be roughly right than precisely wrong."
Winter schminter
The geographic location of emissions is irrelvant. if Australia reduces its emissions by, say, 1 gigatonne, the impact on atmospheric carbon will be exactly the same as if any northern hemisphere country reduced its emissions by the same amount. Our ecosystem is a global one. For any country to lay claim to the carbon sinks in its proximity is nothing less than environmental imperialism.
Northern Winter
If we look at all the evidence and forget political correctness then we all may come to a different conclusion about the impact of humans on the environment. In any case, our grandchildren deserve that we respect their right for a decent future and therefore we must conserve energy and natural resources.
Scientific evidence however shows clearly that Australia and most countries without winter frost are unable to contribute towards a global increase in CO2. Vegetation on land and algae in the water are able to absorb all the CO2 produced within a fairly short distance of their point of emission. The annual changes of global CO2 shows a marked increase during the Northern Hemisphere winter and a strong decline during its summer. It means that virtually no carbon dioxide should be released during winter in the Northern Hemisphere. It remains a far bigger challenge to tell industrialised countries such as Japan, Russia, and USA etc. to stop producing CO2 during their winter than to remain naïve and impose taxes.
Thermodynamics again
Alan, do you still think your air conditioner uses less energy if you turn it on earlier? Call me old fashioned, but if someone has something valuable to say on a topic of climate science I do expect them to have at least a basic grasp of thermodynamics.
Stupid Dinosaurs
It wouldn't have helped them, their problems likely started when a giant meteor slammed into the Yucatan region. We are not talking metors here, but something that we've contrinuted to and have some power to do someting about.
It is fairly clear that most governments, possibly excepting China, will still be bickering and neutering their resonses long after the tipping point is passed. I feel that we are well along this path now.
Politicians are more interested in getting elected than avoiding a precipice. Overfishing is a case in point - the response is almost never sufficient to afert a population crash. (Grand banks?)
I don't think that you have to belive in climate change to be concerned. Peak oil, gas and coal should be cause enough by themselves.
Be it climate or oil prices, both of these issues require response roughy the same response - that is to stop relying on fossil fuels.
Many analyists agree that the later the response is started, the more severe it will have to be.
As a side issue, Egypt is at the crossing point where it becomes a net oil impoter. It is going to be interesting to see how this develops over the next year or two.
Here we go again
Oh dear Alvin and Joe are up to their usual we are right and you are wrong stance again.Your contibutions say more about you than they do about the subject. The science is NOT settled and you may turn out to be wrong.Will you be man enought to admit that if it comes to pass that you have miscalculated. Scientists did get the speed of sound wrong so they are not infalible as you would have us all believe. Discussion is a way of finding the way ahead so be patient a bit longer and we may all learn.
And if dinosaurs had the benefit of risk management ...?
This blog, and most of the posts, seem to be squarely aimed at the dollars and sense of climate change. One thing's for sure: the climate will change in the future regardless of whether humans do something they perceive to be the 'right thing to do', or not, as the expanding universe has its ordained plans for our future well and truly ingrained in the order in which the 'big-bang was dictated, 14B years ago, or there abouts.
Then, only sixty-five million years past, the dinosaurs were going along merrily until some astronomical event crucified their existence. Why are 'we' so uptight about this inevitable outcome, unless it's all about money, which is to be made by those who wish to make something from little substance at the expense of those whose subsistence has little to do with this whole issue.
Man made Global Warming
To those that still seem to be unclear on climate science, the facts are in, it's real!! It has been proven that the burning of fossil fuels contribute to the Co2 levels in the atmosphere and this contributes to a warmer planet. If the Greenland ice sheets melts completely the sea levels will rise 23 feet, flooding coastal cities and towns all over the world, not to mention low lying food producing land such as the rice fields in asia. Have you assessed that risk to the overall economy? Let's stop falling for the waffle that climate change isnt real, accept it and start costing it in. Your grandchildren will thank you for it~!~!
Minority view
Bill stop trying to extrapolate from a minority perspective to a majority view. The science is clear for those that have looked at the primary research, it is only if you rely on interpretations by invested interests does the science become unclear. Irrespective of all of that, this is about doing something positive to address climate change and as Alvin said stop wasting our time!
By the way have you ever heard about the "precautionary" principle?
Risk management
If risk is equal to likelihood (probability) multiplied by consequence, and under the assumption the climate change hypothesis is 'roughly right', then a low-probability but high-consequence event is still ranked as a medium- to high-risk event (depending on your factors, criteria etc).
Peter Watson, as I am sure you are aware, there are other risks than climate change. How about resource scarcity, geopolitical instability, and economic volatility? You may not agree with the climate change hypothesis, nor the scientific exploration into this (or maybe it confounds you?), but these other interrelated risks are statistically proven (or provable) and should also be accounted for in one's assessment of risk.
I think you will find that climate change would exacerbate such risks; even if the original hypothesis is wrong, you'd still come out in front.
I wish you good luck with your business - you may need it!
Its the economy stupid
I think the denier-liars missed the point of the article, its about risk assessment not climate science. If you are having trouble getting to the facts try reading the actual science and not books or articles or websites etc.
There are many reasons to deny the scientific consensus on man induced climate change be they economic, political or psychological, but from a scientific perspective there are no good ones. This is not a debate of two sides there is simply the science and the not science. The science is in and has been for a long time but the not science will, apparently, always be there, yapping away from the fringe.
Does it matter in assessing business opportunities & risks?
The knowns and unknowns of climate change are not that important in assessing the risk of a carbon tax, and its consequences on any business.
The creation of carbon costs imposts is best considered as a sovereign risk. Specifically, a carbon tax may occur even in the absence of any real climate change...or conversely the impost may NOT materialise even if there IS material climate change. Quantification of the risk of a carbon impost (in order to make coherent long tail investment decisions) is far more influenced by other factors germane to sovereign risk assessment – many of which are quite measurable.
Precisely wrong
I'd say the IPCC's theory of man-made climate change has a very high probabilty of being "precisely wrong" rather than "roughly right". Apart from sceptical websites, there are numerous 'climate change' titles on amazon.com which have assisted me in coming to this conclusion.
We all know that the climate has changed since the beginning of time, although some try to obfuscate this fact. In fact there's so much obfuscation surrounding this topic it is a struggle to determine the "knowns" i.e. whether we are currently warming or cooling or static, for a given time frame, let alone trust any prediction on offer.
The one thing that business can rely on is that climate change is now so politicized it resides outside of the scientific arena, but any well informed manager would have already known that.
Precisely Right
Peter, I'm glad to hear that you have indeed taken into account such risks as the "recent significant weather events". Now if you are a good risk manager you'll allow for a high probability that there will be significantly more such events in the future. Good luck.
Here we go again
Peter, if you don't believe in climate change why are you hanging around on this website where people clearly do see climate change as a real and existing threat.
In addition, despite disagreements on the process, they are all interested in examing ways to address it through business and policy.
Most of the people here would feel you are wasting your time and our time with such idle, uninformed comments and it certainly won't go close to changing any opinions on the science.
Roughly right?
So client science is roughly right?
I agree that if I had a clear view of the risks to my business of of any risk management issue, including climate change, I would indeed manage those risks appropriately in my business - unfortunately in the instance of so called climate change I don't have a clear view, and the "science" only makes it less clear.
If however, by use of the term "climate change" you are referring to recent significant weather events that have been happening in Australia for thousands of years, then yes I do take these into account in the management of risk in my business.