Coal barges are pictured as they queue to be pulled along Mahakam river in Samarinda
According to LGIM, the best measure to drive down global emissions is an effective carbon price, whether through a direct tax, a cap and trade mechanism or government subsidies © Reuters

The UK’s largest asset manager has warned that businesses and financial markets are failing to price in the risks of climate change, telling investors to “strap in” and prepare for a “bumpy ride”.

Legal and General Investment Management, which oversees more than £1.2tn in assets, said a delayed shift to a low-carbon economy could leave global equities more than a third lower than in a rapid transition and that a quarter of companies that currently issue investment-grade bonds could face downgrades if a net zero world is not achieved by 2050.

Nick Stansbury, LGIM’s head of climate solutions, said the asset manager had grown “far less confident” that the goals of the Paris agreement on climate change could be achieved even though the economic cost of transitioning to a low-carbon economy had become “incredibly cheap”. 

Under the 2015 Paris agreement, countries agreed to limit global temperature rises to well below 2C above pre-industrial levels, and ideally to 1.5C. The UN Intergovernmental Panel on Climate Change reported last week that a 1.5C rise in the near term was now “more likely than not”.

LGIM said in a report on Wednesday that science and engineering had delivered the cost reductions and technology required for a low-carbon energy system and that the most pressing challenge was now allocating capital at speed and introducing government policies to support the transition.

“The world could easily absorb the costs associated with realising the goals of the Paris climate agreement. But the window to successfully meet a 1.5C climate outcome is closing at a worrying speed,” the report said.

The report, based on extensive modelling by LGIM, said “transitioning to a below 2C climate outcome” would lower monthly global GDP growth by as little as 1 basis point over the next quarter of a century, although this rate varies by region with emerging markets taking a bigger hit.

“Our model shows that the inflationary burden of a low carbon transition in Nigeria is at least four times greater than it is in the UK,” the report said.

While it was cheap to transition now, Stansbury argued that if the world continued to delay for another decade and was then forced to cut emissions rapidly, the inflationary pressures and geopolitical destabilisation would pose a “very serious risk for investors”. 

“The financial consequences of climate procrastination are being badly underestimated,” he said.

LGIM said the best measure to drive down global emissions would be an effective carbon price, whether through a direct tax, a cap and trade mechanism or government subsidies for greener sources of energy.

About 23 per cent of emissions globally are subject to a carbon price, which currently averages $6 per tonne of CO₂, according to the OECD, too low to incentivise companies to change their business models.

LGIM cautioned that carbon prices could surge to about $900 a tonne by the middle of the century if action by policymakers and investors to limit global warming to less than 2C is delayed until the end of this decade.

LGIM’s warning came as some investors attempted to account for the financial impact of climate change in their returns.

On Wednesday, the influential Net Zero Asset Owners Alliance — which counts Aviva and the Church of England Pensions Board among its members — set out new guidance for members to publish oil and gas policies within 12 months on a comply or explain basis.

Under the new rules, investors “who are committed to net zero” should introduce new fossil fuel financing restrictions that include a ban on investments in new oilfields and gasfields, and in new baseload gas-fired power generation without carbon capture technology. However, it has not set a deadline.

Members “are expected to follow this guidance” or risk having to leave the alliance, said Günther Thallinger, the alliance’s chair.

Climate Capital

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