Investors say climate change risks are being ‘undervalued’ in energy stocks

Investors believe that current investment risk calculation “undervalues” how climate change could affect some stocks in their portfolios, according to a new report by the think tank Meteos.

The report, Systems not Silos, which comes as a result of the Energy Futures dialogue, looks at the investment risks involved in energy systems. It argues that the potential negative impacts of climate change are not being properly assessed.

The Energy Futures dialogue involved discussions between investors, who wanted to better understand the future of the energy markets, in order to ensure future stability within the industry.

The subsequent report acknowledges the vulnerability of the energy markets to outside influences, such as supply and demand, political debate and climate change.

It specifically recommends that the investment industry works to bridge “internal silos”, a lack of information sharing, building price and demand scenarios to enhance understanding and improved investor understanding of public policies.

Erik Jan Stork, sustainability specialist at APG Asset Management, said, “The Energy Futures dialogue highlights just how rapid and disruptive changes to the energy system resulting from climate and energy policy have been, and how financial models and risk analysis have yet to anticipate the ramifications in full.”

He added, “It is clear that investors and companies alike will have to develop new approaches to assessing the risks of long term energy and climate challenges if they wish to allocate their capital wisely.”

Meanwhile, Nick Robins, head of climate change centre of excellence at HSBC, said the report “highlights how investor expectations of ‘business as usual’ have already been disrupted by shocks to the energy system – for example by the decline in energy demand and shift to renewables in Europe. Looking ahead, this provides a powerful incentive for investors to exercise ‘capital stewardship’ to ensure that high-carbon assets do not get stranded in the energy transition.”

Further reading:

Investors worth $3tn put pressure on fossil fuels industry to rethink future

Fossil fuel divestment campaigns can help ‘stigmatise’ industry

The investment case for fossil fuel divestment

Climate change a ‘firmly established’ material risk for mainstream investors

The Guide to Climate Change 2013