The Paris Agreement resulting from COP21 was kind of a big deal. It demonstrated the shifting political resolve towards addressing climate change and moving the world towards a low carbon future. As European Commission President Jean-Claude Juncker commented at the end of the COP, “today the world gets a lifeline…This robust agreement will steer the world towards a global clean energy transition”.
The financial sector will play a key role in delivering the economy-wide financial shifts required to maintain global temperature increases below 2ᵒC. For investors, this is particularly salient. Philippe Defosses, Director of French Pension Fund ERAFP, has said that ‘… the world has a shared vision that will lead inexorably to investors moving away from fossil fuels and towards a future powered by low carbon energy.’’ The Governor of the Bank of England, Mark Carney is one of many experts from the financial sector that share this sentiment. In September 2015 Carney clearly outlined the financial instability which is likely to arise from climate change if insurers, financers and the private sector as a whole do not take bold, forward-looking action.
How will the agreement impact investments, assets, loans and (re)insurance? What opportunities will it present? Here are five things to think about:
The Paris Agreement will bring both risks and opportunities to the financial industry. What these mean and how they manifest themselves for individual investors will depend on the portfolio mix and investment under management. What is clear is that investors, fund managers and (re)insurers need to review and assess their existing portfolios for climate change linked financial risks, and extend their investment screening to new ‘low carbon’ opportunities.
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