According to a 2020 report from the UN-backed Inevitable Policy Response project, companies that embrace sustainability stand to gain value in the face of inevitable policy response to climate change. At the same time, as momentum towards net-zero commitments rises around the world, the same group has published a new investor guide, which highlights the importance of land use and the role of negative emissions technologies in the transition to net-zero. The guide also forecasts that nature-based solutions focused on ending deforestation, reforestation and afforestation could generate US$800 billion in annual revenues by 2050 with assets valued well over US$1.2 trillion.
These reports come in the context of public policies aimed at keeping climate change from accelerating, which, if adopted and enforced, could eliminate $2.3 trillion in the value of the world’s largest companies. Such a profound shift in their valuation could, in turn, impose significant financial risks to their business models, and powerfully disrupt the global economy.
Through our Conservation and Markets Initiative, the Gordon and Betty Moore Foundation supports projects like the UN Principles for Responsible Investment, to help companies that seek to evaluate their carbon and climate risk exposure and to prepare investors for associated portfolio risks.
“As the realities of climate change catch up, social pressure mounts, and low carbon solutions get cheaper, it’s highly improbable that governments will be allowed to let the world sleepwalk into greater temperature rises. That makes some form of public policy response inevitable,” explains Fiona Reynolds, chief executive of the Principles for Responsible Investment. PRI represents nearly 2,600 investors with $86 trillion of assets under management.
In a June 2020 investor note, The Inevitable Forest Finance Response: Investor Opportunities,PRI further explains:
“The question for investors now is not if this structural shift will occur, but when it will occur, what policy and market developments will drive it, and where the financial impact will be felt.”
The group’s forecast of the financial impacts of an inevitable policy response looks at how company evaluations would be affected if climate policies changed by 2025, and its authors warn that policies could change at any time as countries scramble to meet their 2015 obligations outlined in the Paris Agreement. “This response will lead to widespread market re-pricing, driving a wedge between winners and losers within and between sectors, inside a five-year investor time frame,” says Reynolds.
According to their calculations, the 100 most carbon-intensive companies are on course to lose 43 percent of their value, totaling $1.4 trillion. The 100 best performers, by contrast, could gain 33 percent of their value. That is equivalent to $.7 trillion in just five years. The energy sector is expected to be hardest hit by this shift, closely followed by auto-makers and utilities. Policies PRI believes will have the greatest financial impact include bans on internal combustion engines by 2035, which could lead to reduced demand in fossil fuels; carbon pricing and costs that will result in crippling costs for high emitters; the switch to ultra-low-emission vehicles, which will disrupt the utilities sector; and zero deforestation policies that will significantly impact global commodity supply chains.
The largest oil, gas and energy firms could potentially lose one third of their current value, which forecasts oil demand peaking around 2027. Meanwhile, coal companies could drop by as much as 44 percent in value. In fact, some insurance firms are taking precautionary measures by denying coverage to new coal-fired power stations due to the heightened financial risks associated with possible future policy changes.
However, companies taking a more proactive approach to reducing emissions could stand to gain significant value. For example, electric utilities focused on investing in renewables could see their evaluations soar by 104 percent. Forward-looking auto manufacturers already transitioning to electric vehicles could see an evaluation increase of 108 percent. Car companies not navigating the speedy transition to electric cars and trucks are likely to see their values drop, as governments take more proactive measures to phase out gas and diesel-dependent vehicles.
In the agriculture sector, firms with exposure to environmental impacts like deforestation for beef production could lose between 15 and 43 percent of their value as a result of dwindling markets and legal exposure.
“This analysis underscores the extent to which markets are underpricing climate transition risk,” Reynolds points out. “We are calling on investors to get real on climate policy risk, and this robust modeling exercise and analysis will enable them to do that.”
The forestry-focused investor note likewise affirms that “climate policy will inevitably reverse historic losses in forest cover given the affordability and broader attractiveness of land-based emissions reductions.” These policies will involve large development projects that expand and restore forests and other “carbon-dense natural ecosystems.” Estimates of this nature-based solutions market value, when measured as the net present value of carbon stocks generated over the next three decades, are $7.7 trillion. For this reason, forest finance can be expected to be increasingly delivered by the private sector, and for those investors wanting to capitalize on the prospect, Principles for Responsible Investment asserts that they must act now.
And their most recently published investor guide spotlights emerging opportunities for investors in forest related nature-based solutions. Alongside deep decarbonization, negative emission technologies will be an important and inevitable part of getting to net zero. The land-use report provides transparency on how these technologies will play this critical role.