Capital Threats Remain Post COVID

By Dharisha Mirando 15 May, 2020

There is no vaccine for climate & water risks. CWR's Mirando highlights risks & steps to take for a green shift of the financial sector

Lockdowns, social distancing and working from home has been good for our health but not so good for the economy. This means that companies less prepared and without strong balance sheets are finding it difficult to handle the slowdown. Those doing ok have been prudently planning for something like this, are in healthcare/tech/gaming or are getting continuous government support – but how long can that last?

There were quite a few warnings about what was about to happen, but some countries still took their sweet time to act. And they’re feeling the most pain both economically and socially – you know who I’m talking about!

Climate change is another potential crisis and the warnings have been coming for years. Isn’t it time to heed the warnings this time? Already this year, there have been 8 big climate risks impacting the world.

There’s no vaccine for climate and water risks, only a long-term shift will help

With COVID-19 we’re all hoping for a vaccine to save the day.

Unfortunately, a vaccine doesn’t exist for water and climate risks and as Mark Carney said, “We have a situation with climate change which will involve every country in the world and from which we can’t self-isolate”.

There is no vaccine for climate & water risks…

…and scarily, still some banks & asset managers don’t realise their portfolios are at risk

The financial sector tends to bury its head in the sand when it comes to physical water and climate threats and water regulations – but as we have shown before, the sector is at risk. And if the sector fails, so do all of us since we’ve trusted banks and asset managers with our life savings. It’s scary to think that some of them may not realise that a large share of their portfolios are at risk.

Finance can prepare by 1) moving away from the fossil fuel sector towards sectors that alleviate or reduce carbon emissions and 2) providing support for adaptation investments so that more people and assets are protected.

Easier said than done, though as the sector procrastinates, our savings will keep getting depleted.

It’s time to grab the bull by its horns and green the financial system

In this year of the rat we need to avoid living up to the Chinese proverb 鼠目寸光 which translates to “a rat can only see in inches” and think more long term. But can the financial sector move to a new normal and transition to a low carbon future? Or will it continue clinging to a bygone era where fossil fuels are the star of the game?

Continuing our current emissions trajectory would cost global economies USD616trn

“Self-preservation” is a good reason – according to new research continuing on our current emissions trajectory would cost global economies USD616 trillion compared to a low-carbon future. That’s almost 30x more than GDP in the US in 2019!

And if that’s not enough the coronavirus has proven that it should transition now rather than later:

• Supporting fossil fuels has proven costly: Just one example is the oil trader that owes banks USD3.85bn, a significant proportion of which it won’t be able to fulfil. HSBC is owed USD600mn and then OCBC, DBS, ABN Amro are all owed between USD250-300mn each. This may seem like a one-off but when we’re looking at thin margins and an uncertain future this might become the norm;
• Sustainable finance has been the more stable option: According to Alison Lee of ADMCF, ESG Doomsday Preppers have been proven right as ESG investments have outperformed the market during all the chaos; and
• Time to get ahead of regulators who are pressing for change: Dr Ma, the ex-chief economist of the PBOC tells us to watch out for regulators pushing financial institutions (FIs) to “quantify the impact of their investments on the environment and climate”. And to help FIs, the Central Banks and Supervisors Network for Greening the Financial System (NGFS) will publish two documents this summer to show how the financial sector can quantify these risks, which will make it harder to avoid showing how risky portfolios are.

To go green, start with these 3 steps

It’s time to rip off the bandage and reset.

If you work in the financial sector and aren’t sure where to start, here are three steps to take to make sure you can side-step the doom and gloom:

1) Are you realistic about where we are heading?

Scientific research of emissions shows that we’re heading for 3°C-5°C of global warming by 2100 – but what climate scenario are you planning for? If you’re planning for 1.5°C-2°C in terms of physical impacts but continuing to invest in fossil fuels, then this makes zero sense and you are going to lose money. Stop doing this!

If you’re not ready to give up fossil fuels then at least realise that your entire portfolio will be at a higher risk from floods, droughts, typhoons etc and you’ll need to protect them. We’d advise against investing in these dirty industries but if you do, then at least be realistic and ensure that your returns are risk-adjusted.

2) Seeing is believing – do you know what’s at risk?

By doing some geo-spatial mapping of the risks you’ll also see what’s vulnerable at each temperature scenario. But even before going into the details of every asset, you can start with cities most exposed so you know which assets you should worry about. The data and maps available aren’t perfect but a rough idea is better than no idea.

Not sure what is at risk? Watch this space! CWR will soon release something to help on the risks for APAC cities

If you haven’t done this yet, watch this space – CWR will be coming out with something to help you understand the relative risks APAC cities face in the next few months. And it’ll be free!

Once you’ve carried out this scenario analysis, you’d be pretty worried by now (we’ve done this, and we’re worried!). And it may force you to rethink your investment strategy as you’ll see that 3°C-5°C must be avoided as the consequences are just too dire – trillions of dollars and millions of people will be at risk.

It’s similar to COVID-19 and the UK’s strategy for herd immunity – looks fine until you map out the potential consequences, which force the government to re-think that path. Please don’t flip-flop like the UK as it didn’t do them any good!

3) It’s time to adjust your portfolio

So, what’s the current plan to avoid a 3°C-5°C future? Start by ditching the fossil fuels – no one wants them right now anyway.

Ditch oil, ditch aviation…

…Buffett sold a large chunk of his airline shares on the long-term view it might go bust

The aviation industry is a good first step since it’s not doing so well and it uses about 8% of oil produced every year. Buffett just did it – he sold a large chunk of his airline shares just one month after purchasing about USD45m of Delta stocks. Has he taken a long-term view that the industry might go bust so it’s better to take the pain now than later?

Also don’t forget to protect your assets as we know that the physical impacts of water and climate risks and regulations are here to stay.

There are opportunities here too, not just costs. For example, we’ll need to build more renewable energy sources, sea walls, more reservoirs and flood defences – who will gain from these?

Being prepared is key, if not your business might go kaput

According to Mark Carney we “can’t wish away the systemic risk”. Hopefully all of the above has persuaded you a little that now is the best time to take advantage of a “once-in-a lifetime unicorn opportunity” to reap the benefits of a green finance reset. Use this to set the tone for the next 12 years as we’re only at the start of the Chinese zodiac cycle. A green future sounds infinitely better than pandemics for 12 years!

Govts are taking this opportunity to go green; look at Air France’s bailout

Governments are starting to see this too – France has set “green conditions” to bail out Air France and the UK government’s advisers have recommended that post-COVID recovery funds should go to those that will reduce carbon emissions.

But we need to be realistic about the future to grasp the multitude of opportunities. Without that, we have no clue what’s coming.

Further Reading

• Are Asia’s Savings Exposed To Water & Climate Risks? – Asian asset owners have portfolios skewed towards domestic markets that will bear the brunt of climate change. Find out about these risks and what to do as our Dharisha Mirando shares key takeaways from the new report China Water Risk co-authored with Manulife Asset Management & the Asia Investor Group on Climate Change
• 3°C Transition Risks: It’s H2O, Not Just CO2 – 3°C is happening. This means we need to invest so we are ready for longer droughts, more intense & frequent floods, more damaging typhoons, as well as changing monsoon patterns and river flows. China Water Risk’s Dharisha Mirando & Debra Tan warns.
• Banking On Granularity To Reduce Climate Blindspots – Climate & water risks are locational but most financial institutions are flying blind, not having mapped their assets. Until they do, they & our savings are exposed. CWR’s Dharisha Mirando expands
• Climate Fight: Finance As Asia’s Most Effective Weapon – Green finance is set to take off as regulations promote carbon pricing and better disclosure but Dr Ma and Huang also see gaps that need closing like integrating ESG factors in risk management
• Thirsty And Underwater: Rising Risks In Greater Bay Area – How will water & climate risks, including rising sea levels & droughts, threaten the already water-stressed Greater Bay Area (GBA)? CWR’s Tan & Mirando explain in their latest CLSA report and highlight companies’ failure in climate risk disclosures
• No-Sense Climate Strategies: From DSD To HSBC – Hong Kong’s shortsighted & unrealistic climate plans will leave key assets & infrastructure exposed that mean the government, companies, investors and the public are even more exposed. China Water Risk’s Dharisha Mirando & Debra Tan expand

More on Latest

• The Future Of Finance – HKGFA’s Dr. Ma Jun believes in post-COVID times, investors & bankers should expect more emphasis on environmental disclosure by regulators, which will pave the way for higher quality green finance products
• ESG Doomsday Preppers – Many laughed at Doomsday preppers but who is laughing now as companies integrating ESG outperform during the crisis? ADMCF’s Alison Lee explores why this is & the future direction
• Top 10 Responsible Investment Trends In China In 2020 – With their finger on the pulse, SynTao Green Finance runs through 10 key trends on responsible investing in China in 2020
• Asia, Why On Earth Would We Leave Our Future To G7? – With G7’s absent leadership & inability to plan for pandemics, CWR’s Debra Tan calls for Asia to step-up & lead the global fight against our climate crises. Tycoons, think about it – what’s the point of building empires that will kill your grandchildren?
• 8 Risks You Missed During COVID-19 – Been focused on COVID-19? You are not alone but we can’t get distracted from the climate crisis. Catch-up with CWR’s Chien Tat Low who runs through 8 latest climate & water risks