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Wednesday, April 20, 2016

Strategic CSR - Risk

The article in the url suggests that financial regulators are ahead of politicians in preparing for the environmental changes that are coming:
"Regulators around the globe are researching potential risks to financial stability from a failure to contain climate change or a sudden collapse in the value of fossil-fuel assets. Institutions such as the Bank of England, the Financial Stability Board and the European Systemic Risk Board are examining how banks, insurers and pension funds would cope if policies designed to reduce carbon-dioxide emissions led to a sharp drop in the share price of oil, gas and coal companies."
As a result, investors need to understand that companies directly involved in the extraction business will find their license to operate increasingly constrained:
"They are looking at new rules to disclose exposures to both stocks and bonds in such companies, conducting stress tests based on different climate scenarios or even requiring additional capital buffers."
The concern among regulators is that, if investors suddenly wake up to the potential danger after ignoring it for so long, there could be significant economic dislocation as the financial world adapts to a new reality:
"'A wholesale reassessment of prospects, especially if it were to occur suddenly, could potentially destabilize markets, spark a pro-cyclical crystallization of losses and a persistent tightening of financial conditions,' Mark Carney, governor of the Bank of England, said in a recent speech.
Like all macroeconomic policy attempts to manage the global financial system, however, regulators are wielding a sledgehammer that can do as much harm as good unless it hits the right target:
"'We have got to make sure that we don't somehow create a whole artifice for one type of risk, which is different from the artifice of others,' says Spencer Dale, chief economist of BP and a former executive director for financial stability at the Bank of England. Mr. Dale says only around 2% to 3% of proven fossil-fuel reserves are actually featured on energy majors' balance sheets, limiting the danger of a sudden drop in the companies' value due to climate-change policies. 'The idea that somehow that we have a carbon bubble—in the sense that the assets that are currently on oil companies' balance sheets are overpriced, because they won't be able to use them—I don't think makes any economic sense,' he says."
The upshot is that there is a great deal of uncertainty about how exposed companies are, given that the full extent of the risks is also unknown. As such, regulators are trying to change the direction of the financial industry, without really knowing where they want to go:
"Because there are no unified disclosure rules, it is difficult to put a number on financial companies' exposures to carbon-heavy assets—and the risks associated with them. Estimates used by the ESRB suggest that banks, pension funds and insurers based in the European Union hold more than €1 trillion, about $1.1 trillion, in equity and debt of fossil-fuel companies and that major stock indexes could fall by as much as 20% if assets are revalued in line with a 2-degree scenario."
All of this wouldn't matter so much, except the stakes are so high.
Take care
David Chandler & Bill Werther
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Regulators Examine Financial Risks of Climate Change
By Gabriele Steinhauser
April 1, 2016
The Wall Street Journal
Late Edition – Final