New climate change policies that are being introduced globally to combat climate warming, for example banning the use of internal combustion engines that run on fossil fuels, could significantly reduce the value of companies globally by as much as US$2.3 trillion, according to a report that was recently released by Principles for Responsible Investment.
The report, titled: "Preparing investors for the Inevitable Policy Response to climate change" suggests that the value of listed companies could be slashed by 4.5%, equating to US$2.3 trillion.
However, the inevitable introduction of these new policies also presents opportunities for forward-thinking investors and financial strategists. Companies that take heed of these new policies and adapt accordingly are likely to experience an increase in their share prices, which according to the report could collectively be to the tune of hundreds of billions of dollars.
Globally, investors are exerting pressure on corporations to not only operate in a more sustainable manner, but also to be more forthcoming with regard to the business risks they face from extreme weather and climate change.
This new report assesses the impact that changing climate policies could have on company stock valuations if these new policies are implemented by 2025. But, the report also warns that policies can change at any given time, and investors need to take heed of this. The sectors that are expected to be most affected by new policy changes include the energy sector, followed by the motor industry and utility providers.
It is expected that policy changes will be fueled by bans placed on internal combustion engines, which are expected to be in place by 2035, together with carbon taxing and the reduction and ultimately phasing out of the use of coal. According to the report, low-carbon energy sources such as solar and nuclear are expected to replace coal.
Energy producing companies are the most at risk, standing to lose as much as 33% of their stock value, with the top ten oil and gas producing companies expected to lose $500 billion collectively. According to the report, upstream businesses in the energy sector that focus on locating and drilling for fossil fuels will be the most affected, while coal mining companies are expected to see their value drop by half.
A Shift in Climate Change Policies Also Offers New Opportunities
However, with change comes new opportunities for pro-active investors. For example, car manufacturers that switch to electric vehicles and utility companies that embrace sustainable alternative sources of energy are likely to see their valuations increase by 50% or more, says Principles for Responsible Investment CEO, Fiona Reynolds. Manufacturers of wind and solar energy technologies are also likely to see an increase in their stock valuation as demand for sustainable energy increases.
Considering these factors, the prudent investor should be sitting up and taking note. This would mean having a good look at their current portfolio and assessing the impact that sudden policy changes might have on the value of any stocks held, and if necessary, switching to greener assets, that may not only be more environmentally sustainable, but also more economically sustainable in the long term.
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