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The Actuary The magazine of the Institute & Faculty of Actuaries

‘Inevitable’ climate policies could wipe $2.3trn off company values

Abrupt and disruptive policy responses to climate change could permanently wipe up to $2.3trn (£1.75trn) off the valuation of the world’s largest companies by 2025.

Fossil fuel firms to lose a third of value ©Shutterstock
Fossil fuel firms to lose a third of value ©Shutterstock

That is the stark warning from a new UN-backed report, which claims that such responses are “inevitable” as the public demands governments do more to tackle climate change.

Bans on internal combustion engines by 2035, and 93% total power generation from low-carbon sources by 2050, are among the policies forecast to have the greatest impacts.

This will create major winners and losers, with the 100 worst-performing firms in the MSCI ACWI index losing 43% of their value, while the 100 best performers grow 33% in value.

Fiona Reynolds, chief executive of the Principles for Responsible Investment, which published the report, warned that markets are seriously underpricing climate risks.

“It’s highly improbable that governments will be allowed to let the world sleepwalk into greater rises in temperature, making some form of policy response inevitable,” she said.

“This response will lead to widespread market repricing, driving a wedge between winners and losers within sectors and between them inside a five-year investor time frame.”

The report states that the world’s largest listed coal companies could halve in value, with the fossil fuel sector in general seeing its valuation slashed by a third.

However, automakers with high investments in electric vehicles could see their value increase by 108%, while utilities most committed to renewables could see their valuations double.

The report comes as policymakers meet at the COP 25 climate summit in Madrid, and does not consider risks such as physical damage from climate change or financial contagion.

“This analysis underscores the extent to which markets are underpricing climate transition risk,” Reynolds continued.

"We are calling on investors to get real on climate policy risk, and this robust modelling exercise and analysis will enable them to do that.”

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