FEW people place great store in the ability of negotiators to reach a meaningful deal during the conference on climate change that began in Paris this week. One problem is that some politicians refuse to admit the problem is real. But those who work in the financial markets have to take the issue seriously: ever since being hit by losses from Hurricane Andrew in 1992, insurance companies have been modelling climate risks. Bank of America Merrill Lynch (BAML) just weighed in with a 332-page report on their economic and financial impact.
A changing climate, and the eventual efforts of governments (however reluctant) to deal with it, could have a big impact on investors’ returns. Companies that produce or use large amounts of fossil fuels will face higher taxes and regulatory burdens. Some energy producers may find it impossible to exploit their known reserves, and be left with “stranded assets”—deposits of oil and coal that have to be left in the ground. Other industries could be affected by the economic damage caused by more extreme weather—storms, floods, heatwaves and droughts. “Investors have to worry about a material and...Continue reading
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