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Climate policy could wipe $2.3 trillion off global companies: UN-backed group

Policy changes introduced as economies adapt to climate change could wipe between $1.6 trillion to $2.3 trillion off the value of major global companies by 2025, and investors need to reflect that policy risk in their strategies, according to research conducted for the U.N.-backed group, Principles for Responsible Investment.

According to an analysis by consultants Vivid Economics and Energy Transition Advisors, policy changes would reduce by 3.1% to 4.5% the value of companies on the benchmark global equity MSCI ACWI index, or the equivalent of the total value of the largest 12 to 33 companies on the London Stock Exchange's FTSE100.

"2025 for some investors is probably a long way off but even [with] impacts that only kick in in 2025, you can see they can affect values of what you are holding today," Jason Eis, executive director of Vivid Economics and one of the report's authors, said in an interview.

The research demonstrates clear winners and losers among the companies that adopt policy changes in their business strategy, with the 100 worst performing companies in the MSCI ACWI losing 43% of their current value, equivalent to $1.4 trillion, while the 100 best performers would gain 33% of current value, or $0.7 trillion.

Governments and regulators are increasing efforts to curb climate change and introducing policies to protect economies from the risks of a changing climate. France, for example, in 2015 passed an energy transition law designed to reduce greenhouse gas emissions and energy use. The EU is embarking on a sustainable finance action plan, which includes the establishment of a classification system to define environmentally-friendly investing.

The expected policy changes in the scope of the research include bans on polluting engines, the switch to low-emission vehicles, 93% of total power generation coming from low carbon sources by 2050 and zero deforestation policies by 2030.

Winners and losers

Investors need to look at how companies and sectors are adapting to policy changes, Eis said.

"Power utilities should do very well because there will be more power demand in the future than ever before, but the winners and losers do radically differently and so some companies that are dirty power producers are going to do very badly under a strong policy response," he said. Car manufacturers who are switching to electric will also benefit.

Electric utilities with strong renewable strategy could see their valuation double, while those which do not adapt could see their valuations fall by two-thirds and car firms investing more heavily in electrical vehicles will see their values increase by 108%, the report said.

While the world's largest listed coal companies could almost lose half of their value, miners producing minerals key to a climate transition would see a 54% upside, and those with the smallest share of "green minerals" would suffer a 49% fall in value.

The 10 largest companies in oil and gas exploration and production would lose nearly a third of their current value, or $0.5 trillion.

"This analysis underscores the extent to which markets are under-pricing climate transition risk. One in five of the world’s most valuable companies are impacted by at least 10% in either direction," Fiona Reynolds, CEO of the PRI, said in a statement.

Increasing pressure

Agricultural firms involved in biofuel production or production of alternative protein sources would benefit from a rise of 10% in value, while those exposed to cattle, for example, would lose 15%. Companies involved in deforestation would lose 43% as they become subject to legal action and consumer pressure.

Investors need to take into account a full set of risks related to climate change and potential opportunities and need to think about managing risks and resilience over the longer term, Eis said. There was increasing pressure on asset owners and managers to act on policy change risk with regards to their investments, he said.

"The sooner you act on this, the more possibility there is for adjusting and avoiding too much of the risk becoming manifest," he said.

While most environmental, social and governance funds had more of a corporate and social responsibility approach, funds will start taking into account the financial risks of climate change, Eis said.

Among global regions, Eis said Europe was one of the fastest moving in terms of policy shift on climate change, saying the U.K.'s deployment of offshore wind farms was "beyond what was expected" and noting "significant" sales of electric vehicles in Norway.