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Newsletter

Newsletter November 2019

Abrupt responses to the climate crisis

 

 

It’s inevitable for the governments to be forced to act decisively, abruptly, at the last minute.

Financial markets do not assess adequately the risks resulting from probable economic policy responses that governments can adopt due to their commitments to combat climate change. When they arrive, probably abruptly, there’s a high chance of excessive reactions.

This statement has been issued by the proponents of the IPR (Inevitable Policy Response) - a project that intends to prepare investors for the risks associated with the climate emergency. The IPR defines itself as a global proponent who assumes leadership in responsible investment. It is made up of 500 portfolio managers and it counts with UN support.

This warning of possible reactions was included in their latest report, which some media, including the Financial Times, have echoed. Other reports, such as those reviewed in the New York Times and Truthout, specify some more concrete effects in the mortgage market.

The assumption of the risk of sudden reactions in the prices of financial assets is simply based on the inadequacy of the actions so far taken by governments to neutralize the already visible effects of the climate crisis. We are clearly behind the commitments adopted with the signing of the Paris Agreements in December 2015, and the assumption of the markets today is that no important decisions will be taken shortly. However, the realities accompanying this climatic emergency are sufficiently explicit to know that it will be inevitable for the governments to be forced to act decisively, abruptly, at the last minute. The IPR experts estimate that governments will start reacting around 2025… and not precisely in an orderly manner. Obviously, no other suggestion for investors can be driven from this estimate than to adopt decisions aimed to protect the value of their portfolios and take care of the risks latent in some assets, believing that the sooner these decisions are made the lower their potential costs will be.

The reality is already sufficiently explicit, but from now on it will urge, even more, nourished by the fears of natural catastrophes, by social and electoral pressure, but also by concerns about national security. Possible steps taken by governments vary from a ban on the use of coal and internal combustion engines to increasing nuclear and bioenergy capacities, from intensified efforts to achieve greater energy efficiency to reforestation and mechanisms aimed to raise the price of CO2 emissions. These decisions can affect various areas, such as macroeconomics, land use and, of course, the energy sector.

Regardless of whether all these conclusions of the IPR are taken into consideration entirely, still it is quite sensible to suggest that companies should prepare for the transition in a proactive and strategic manner, especially the industrial ones, but the financial ones as well. In the latter case, the investment committees are called to play a relevant role, given that they carry out the classification of the investments in accordance with the new restrictions.

Beyond these reasonable warnings, these days certain markets, as significant as the mortgage, have also been affected by publication of specific studies. The aforementioned references provide sufficient information. The risks of rising sea levels and other natural disasters cause depreciation of dwellings built near coastlines, which have begun to have an impact on mortgage prices. Insurance companies also have reasons to be alert.

The report referred to by the New York Times explains how banks are trying to move the mortgages of greater climate risk to public mortgage institutions, establishing analogies with what happened in the years preceding the subprime mortgage crisis. The hurricanes experienced between 2004 and 2012 will add to those movements. The lenders would increase the mortgages sold to the state agencies Fannie Mae and Freddie Mac by 10% due to the greater risk of insolvency.

EMILIO ONTIVEROS 10/10/2019

Source: https://elpais.com/economia/2019/10/09/finanzas_a_las_9/1570639257_526323.html

The photo was taken from the site https://pixabay.com/.

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