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This is the biggest investment risk you face

And more and more people are recognising it.
It is becoming untenable for asset managers to value companies and opportunities on financial metrics alone. Image: Shutterstock

Every year the World Economic Forum puts out The Global Risks Report, which shows what 750 global experts and decision makers rate as the world’s most pressing challenges over the coming decade.

In 2020, for the first time ever, the top five risks identified by this group in terms of how likely they are to occur are all environmental.

As the table below shows, environmental risks have been prominent for some time. However, they now completely dominate the list.

Top five global risks in terms of likelihood

Source: World Economic Forum Global Risks Report 2020

In addition, the report identifies three environmental issues among the top five risks that could have the biggest impact if they are not addressed. The biggest risk the world faces, they believe, is that we fail to take action on climate change.

Top five global risks in terms of impact

Source: World Economic Forum Global Risks Report 2020

As the report states:

“Climate change is striking harder and more rapidly than many expected. The last five years are on track to be the warmest on record, natural disasters are becoming more intense and more frequent, and last year witnessed unprecedented extreme weather throughout the world. Alarmingly, global temperatures are on track to increase by at least 3°C towards the end of the century – twice what climate experts have warned is the limit to avoid the most severe economic, social and environmental consequences.”

Taking hold

It is no longer a case that governments and business are waking up to this reality. That has already happened. It is now universally accepted that action needs to be taken. The only disagreement is on its approach and scale.

Even though US President Donald Trump is a climate science denier, and his recent speech at the World Economic Forum in Davos criticised “prophets of doom and their predictions of the apocalypse”, he nevertheless promised some action on the environment. He committed the US to the One Trillion Trees initiative, and insisted that he wants clean air and water.

His critics would say that this is not anywhere near enough, but it still highlights how nobody can avoid recognising the pressing nature of environmental risks.

Fundamental shift

This is true in financial markets as well. In his recent annual letter to CEOs, Larry Fink – chair and CEO of BlackRock, the world’s largest asset manager – announced that his firm’s active funds will be exiting their positions in any company that generates more than 25% of its revenues from thermal coal production.

It will also be using the strength of its large shareholdings in many companies through its index funds to engage more intensely around improving climate disclosures and aligning business models with a transition to a low carbon economy.

“Climate change has become a defining factor in companies’ long-term prospects,” Fink noted. “Last September, when millions of people took to the streets to demand action on climate change, many of them emphasised the significant and lasting impact that it will have on economic growth and prosperity – a risk that markets to date have been slower to reflect.

“But awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance,” he added.

Read: The biggest challenge facing the investment industry

BlackRock’s decision has been commended, but advocates argue that this was a position the firm had effectively been forced into adopting. As Just Share, a local non-profit shareholder activism and responsible investment organisation, noted: “It was impossible for BlackRock to take any other position and maintain credibility as a responsible investor.”

Left behind

Investors cannot ignore this. If asset managers like BlackRock have had to adopt the policy that they will no longer be investing in certain industries, that has material implications for the share prices of companies in those sectors.

Read: You can’t ignore $11 trillion

Equally, they need to be aware of how thinking in financial markets is shifting. It is now becoming untenable for asset managers to value companies and opportunities on financial metrics alone.

“The evidence on climate risk is compelling investors to reassess core assumptions about modern finance,” Fink accepted in his letter.

“Research from a wide range of organisations – including the UN’s Intergovernmental Panel on Climate Change, the BlackRock Investment Institute, and many others, including new studies from McKinsey on the socioeconomic implications of physical climate risk – is deepening our understanding of how climate risk will impact both our physical world and the global system that finances economic growth.”

The essence of this is that the environmental risks identified by the World Economic Forum are no longer merely external issues for companies to consider. They are going to have a real impact on the way their businesses operate. This means they are real matters for investors to contemplate as well.

“Investors are increasingly reckoning with these questions and recognising that climate risk is investment risk,” wrote Fink. “Indeed, climate change is almost invariably the top issue that clients around the world raise with BlackRock.

“From Europe to Australia, South America to China, Florida to Oregon, investors are asking how they should modify their portfolios. They are seeking to understand both the physical risks associated with climate change as well as the ways that climate policy will impact prices, costs, and demand across the entire economy.”

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Yes. It looks like the climate issues are the in thing now a days.
These global experts should get proper jobs.

Why? It is a lucrative business with tenured professors getting juicy research grants to run crappy computer code with even crappier (and doctored) datasets to predict doom and gloom.

These shysters have been doing it since the 60’s with their Great Global Cooling scare back then.

Ironic that they cant even predict the weekend weather correctly, yet predict 0.5 deg C avg. temperature changes a century from now….

Call me a crank but isn’t this climate change thing just a big hoax? Actionable? (are you kidding). Climate change is explainable through solar orbitals and solar cycles. How do they propose changing the Sun’s orbital?
Global warming? The CO2 level has gone up by 40ppm since 2000 A.D. But water in our atmosphere, with a much much more potent greenhouse effect, how much has that increased?
Which leads to the next point…why is the pedosphere drying out?
Thumbsuck guesses are: 1) excessive use of cloud seeding by the Chinese and other nations or 2) industrial pollution which may be causing hygroscopic absorption of water.
Other than this, biodegradation is consequence of overpopulation. We should get used to it. The global population is heading for catastrophic decline. But on the far side of our population peak the environment will be permanently degraded to an extent.

Any decline of human population is a blessing upon all of the species of life that are being decimated to extinction on an increasingly unprecedented scale. There has been a well documented and irreversible damage effect.
The root cause is all the ancient, ultra-conservative cultism that is male-dominated and requires all females to be subjected to uncontrolled multiple child bearing and subservience.
But hey you guys, who cares about their human rights anyway?

I read the anxiety in the early 70’s was an impending ice age
In the 1980’s acid rain was wiping out forests
Early 1990’s it was then global warming
Post 2000 it’s climate change
No one in the scientific community cares to mention in the age of the vikings global temperature was 2 degrees higher and they were doing farming and agriculture in Greenland

My bet this decade will be bio-hazard-anxiety

Another big investment risk you face if you invest through a fund manager is high fees which kill your investment.

You also have to worry that your fund manager is not gambling your money on the stock market.
A question you should ask your fund manager is how much of his own personal wealth does he invest where he invest his client’s money.

Does he invest 10% or 90% of his wealth where he invest his clients money?

Does he gamble his client money on the stock market and bank his money in property in Camps Bay? People in the financial industry love buying properties.

Nope, for a South African investor, by far the biggest risk is not climate change, but the regime’s socialist policies forcing your investments into subsidizing loss-making state-owned companies and the risk of the currently depreciating in leaps and bounds. Forget about climate change and worry about communist policies.

Agree 100%….developed countries worries what Greta Thunberg (a pawn for climate change money spinners) has to say….

….while SA has a battle for economic survival, and losing relevance.

Exactly -corrupt ANC and friends are the biggest investment risk for SA. Forget other PC stuff.Look at Zim-destroyed by Africa corruption and politics.

More than a risk, that is a clear and present danger.

This is South Africa where the sun shines over the whole nation most beautifully more days than not. A local pastime is to sit under a tree & tell full stories will bells on of past accomplishments & victories over adversaries & foes. Soon though under the tree there’ll be no room left as the earth is barren & there’s tooooo many people trying to sit there.
Sustainable investment is a colonial/western term that is not easily translated into local dialogue.

Yes. That is why the whole world speaks English. Then we are all on the same page.

Thanks Patrick.

I guess the average Australian bushfire victim would agree with this risk analysis.

As Bill Gates says: “There are those who deny climate change and those who who think it is easy to fix”.

The evidence is in. The Australian bushfires are not a result of climate change but fuel loads accumulating due to appalling management practices. Most Australian bushfire victims agree that it is labor/green policies of not clearing bush and prescribed burning that has led to this disaster. The aboriginal folk knew more about fuel load management hundreds of years ago.

As far as I can remember burning fire breaks was standard practice for SA farmers.

The biggest threat to profitable investing in SA is Dear Cyril …

The climate is changing. This is as true now as it has always been. It never stops. Not just seasons but temperature drift and rainfall drift and all the other consequentials.
The orbit drifts. The sun ebbs and flows. The continents drift. The magnetic fields cycle and drift.
Everyday there is additional data, further learning. The variables are myriad and complex. This is not a study for the faint-hearted or weak of discipline.
No one else is saying this. This does not mean that it is not true.

Its so sad that the the comment section here is packed with a bunch of knuckle-dragging troglodyte who are climate change deniers. Good thing most old so your antediluvian generations is phasing out with time.

I beg your pardon. This is indicative of the decryers who stand for the climate change scandal. Resist them and you are called names and shouted down by these contemptuous draconian behemoths. Go trogolodyte yourself tree dwelling ape, lest your trees are sloughed away by your coming flood of climate change or population uprising.

Looks like the climate change denialists who get their “facts” from Facebook are now in the Moneyweb comments section.

The biggest challenge to modern society isn’t climate change, it’s misinformation. Misinformation from corporate interests (Bell Pottinger-like entities, energy companies), antivaxxers and hostile governments, all constitute the greatest threat to modern society, since they sow confusion, and induce a dangerous paralysis in societies.Currently the biggest predictor for political success is “do they have the trolls on their side?” .

Until the issue of misinformation on the internet is confronted, we won’t make progress on the other issues.

Broad based assumptions that generalize all differing viewpoints by grouping them together and summarily trashing them has become the trait and hallmark of those that choose to adopt the ancient practice of intimidation in the hope that all the other viewpoints will be made to go away and allow the wannabe omnipotent one to hog the microphone and turn up the volume. This of course is then no longer a free discourse but becomes a one-sided propaganda exercise involving indoctrination with intimidation, which I recall as being symptomatic of totalitarianism and fascism.
One popular and associated technique includes table turning whereby any shortcomings that may become evident with the intimidator are deflected by being turned into accusations against the related observer.

End of comments.





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