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The burning question: How does global warming affect investors?

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Insurance companies and others could face potentially huge liabilities from severe weather such as floods and drought. Photo: AFP

Global warming is a source of unprecedented deep risk for investors, with no easy answers.

Like wars or confiscation, global warming may be best thought of as a source of "deep risk", a term coined by investor William Bernstein to describe those risks, unlike a cyclical stock market crash, from which an investor may not be able to recover.

Bank of England Governor Mark Carney on Tuesday urged insurance companies and others to get out in front of those risks, arguing that "once climate change becomes a defining issue for financial stability, it may already be too late".

Carney called for more transparency about the carbon intensiveness of firms, and cautioned that insurance companies and others face potentially huge liabilities from severe weather, drought and disorder. Carney also warned that 20 to 33 per cent of global fossil fuel reserves could prove to be "un-burnable" as a result of regulation, imperilling the value of an industry that comprises about a third of all global equity and fixed-income assets.

Speaking to a group – insurance companies – which must think in decades, his call is a tall order. For individual investors, even those saving for a retirement or bequest in the distant future, global warming is an even more difficult puzzle.

Carney argued that making carbon use transparent "allows sceptics and evangelists alike to back their convictions with their capital". That formulation ignores that most investors aren’t so much sceptics about global warming as doubtful of their ability to anticipate how it might play out in financial markets.

Take the concept of stranded assets in the energy industry. That analysis depends on many things, chiefly that the world will decide to adhere to a "carbon budget" to cap global warming, resulting in policies which will make the stranded petrochemicals uneconomic. That’s certainly possible, and arguably desirable, but is a political outcome outside the scope of most investors to anticipate.

If we look for a read-across from other harmful industries, the idea that they will be starved of capital and collapse or do poorly as a result of regulation should give investors seeking to de-carbonise their portfolios little comfort.

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