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A “+4 degree world is not insurable” so why invest in brown assets?

Mark Carney

The world’s central banks need to recognise not all assets are of equal value, according to a report just released by the Climate Bonds Initiative. Some are downright disasters in the making.

Banks like assets, they like them a lot. They like to invest in them and make money from those investments.

But according to a report just released by the Climate Bonds Initiative, the world’s central banks need to recognise not all assets are of equal value. Some are downright disasters in the making.

According to a new report from the CBI banks need to develop a “brown taxonomy” – to identify assets that are increasingly vulnerable to sharp revaluations and pricing volatility from climate mitigation policy and physical risks.

Investments should be shifted towards green assets, and the doctrine of “market neutrality” [all dollars are equal] and reviewed as part of a suite of measures central banks and financial regulators should apply to address the systemic risk climate impacts pose to the global financial system.

Tilting the playing field – the role of central banks was produced by CBI in conjunction with London School of Economics’ SOAS Centre for Sustainable Finance and WWF in the lead up to this year’s World Bank and International Monetary Fund annual meetings in Washington DC.

According to Ulrich Volz, founding director of the SOAS Centre for Sustainable Finance,  central banks and financial supervisors have a key role to play in ensuring that the financial sector addresses climate and other environmental risks and that financial flows are aligned with the Paris Agreement.

“Financial governance can be only part of a broader public policy response to addressing the climate crisis, however its role cannot be overstated.”

Mr Volz said that while he doesn’t agree with all of the report’s recommendations, they will “contribute to a much-needed discussion that will help central banks and supervisors develop adequate policies in response to the climate crisis.”

What is a “brown taxonomy”

The report defines brown assets as including fossil fuel assets, equipment and inputs using fossil fuels and assets highly vulnerable to physical risks from climate.

It notes the definition of a brown taxonomy has “proved to be highly political.”

Businesses in the brown economy have successfully, through the European Parliament, stopped the EU Commission developing such a taxonomy, the report says.

“Governments depending on their endowments of fossil fuels deposits may take different views of whether say, gas infrastructure is brown or a transition solution.”

Finance investing in a four-degree trajectory

The situation is at crisis point, with warnings this week from Bank of England governor Mark Carney that global capital is investing in planetary disaster, financing $85 trillion in stocks and $100 trillion in bonds for activities that will keep us on a four-degree warming track.

That’s a scenario that spells out global disaster, including sea level rises in the order or metres.

According to IPCC modelling, four degrees of warming would see most of Australia experiencing 60 or more days a year of above 40 degree maximum temperatures. In large parts of WA, South Australia and the Northern Territory, daytime maximum temperatures exceeding 40 could be expected for more than six months of every year.

And there is unlikely to be any insurance company willing to pay out when the impacts hit.

The CBI report quotes AXA chief executive Thomas Buberl’s statement back in December 2017 that a +4 degree world is “not insurable”.

AXA announced it was shifting out of fossil fuel investments and into green ones. Further, said it would be “inconsistent to commercially support industries that the group is divesting from.

“Therefore, AXA will stop insuring any new coal construction projects. Similarly, the group will stop insuring the main oil sands and the associated pipeline businesses.”

But not every source of capital is as enlightened, and fossil fuel enterprises backed by the banks remain a major problem.

The carbon cash cow needs to be put out to pasture.

A report by the University of New South Wales released this week said the Australian gas, coal and oil producing companies contributing to climate harms have a moral responsibility to rapidly phase out their operations and retire their assets.

The Australia’s Carbon Majors report found that the emissions produced from the coal extracted from Australia’s top six coal producers were greater than the whole of Australia’s projected domestic emissions for 2018.

“Why aren’t Australian carbon majors considered to be responsible for addressing their emissions and the consequences of their emissions?” lead author and Professor of Political Philosophy Jeremy Moss said.

“The impact of carbon majors is now so large and their influence so great that the case for holding them responsible for the consequences of their emissions must now be made.”

Findings include:

  • Over the past 15 years, BHP alone has produced fossil fuels that have led to emissions that are four times Australia’s 2018 emissions.
  • The 10 largest Australian carbon majors produced the equivalent of about 75 per cent of the emissions from global air traffic, or around 28 million flights, and more greenhouse gas emissions than the entire nation of Canada.

BHP Billiton also made another shameful list recently, being among the top 20 emitters globally called out in a report by the Climate Accountability Institute.

The UNSW report recommends companies who are major agents of harm should show some moral responsibility, and “take a hybrid approach to phasing out their operations”.

This would include:

  • Fossil fuel mines should be retired, not on sold to other companies.
  • Carbon majors set aside appropriate funds for site rehabilitation.
  • Rehabilitation costs take precedence over shareholder returns, with profit-sharing to occur from ‘clean’ parts of the business.
  • Carbon majors prioritise compensation for harms caused by past emissions, at least those emitted since 1990.
  • No new mines be built.
  • Carbon majors cease political lobbying and not fund third party campaigns which are in favour of fossil fuels.

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