The climate change storm clouds are threatening carbon Value-at-Risk – asset managers beware

Posted on Posted in Chairman’s Blog

Just because, today, a carbon tax is either non-existent, toothless or unenforcible, don’t imagine that one will never be created, given teeth and enforced. The climate change storm is already rumbling and its pressure building steadily towards this inevitability – it may be next year, the year after, or the year after that. But prudent asset managers should be wary of its potentially ruinous impact.

My previous blog ‘Last Man Standing’, showed current carbon pricing to be a chaotic, largely unsustainable patchwork that is doomed. I argued that the only viable carbon price is the PAL REACT (Reinsurance Event-Attributed Carbon Tax) because it is based entirely on scientific evidence and is wholly devoid of political diktat. At the time of writing it stands at about £18($23)/tonneCO2. Adopted as a benchmark in corporations, city states, regional authorities, federal states and sovereign countries, REACT would unify worldwide carbon pricing and provide the level playing field called for by the UN, IMF and The World Bank. It hasn’t happened yet – but when all else fails?

Human survival dictates that the planet must – and will – be saved, but at enormous cost. Polluters will surely be forced to pay some form of punitive carbon tax. Corporate and sovereign ‘business-as-usual’ practices will be turned on their heads; shareholder and taxpayer expectations will be in jeopardy; investment-, pension- and hedge-funds will be especially vulnerable. All Value-at-Risk (VaR) assets need to be gauged and the fallout calculated and prepared for now.

VaR is a well accepted methodology for quantifying expected losses over time for an investment portfolio. Emissions statements are increasingly commonplace, but their role in the company balance sheet is limited if they lack tangible values by which their true monetary worth – or indeed, liability – can be assessed, both now and into the future.

We have looked at and compared many companies and evaluated their contrasting VaR. As shown in the pie chart, the vast majority of sectors with a high VaR are oil and gas producers, mining, construction & materials, and travel & leisure. In our recent report ‘Measuring FTSE 100 Carbon Value-at-Risk’ we break this down into fine detail for individual FTSE100 companies. It is a sobering indication of the pressure behind those climate change storm clouds.

Asset managers ignore it at their peril.


25 Year Carbon Value-at-Risk - FTSE 100 by Sector

Bruce Menzies, Chairman, Predict Ability Ltd (PAL)

© Copyright Predict Ability Ltd 2017. All rights reserved.

Bruce Menzies

Author: Bruce Menzies

Bruce Menzies is Chairman and co-founder of PAL. He founded Global Digital Systems Ltd that won the Queen’s Award For Enterprise 2011. Bruce is co-author of six books on geotechnics and geology, one of which won the British Geotechnical Association Prize 2002. He holds doctorates from the Universities of London and Auckland, and is a Fellow of the Institution of Civil Engineers.

The climate change storm clouds are threatening carbon Value-at-Risk – asset managers beware was last modified: February 2nd, 2019 by Bruce Menzies

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