COP 27: Irrational Exuberance & 3 Signs of Imminent Crash

By Debra Tan 23 November, 2022

CWR’s Tan calls out who’s walking the talk at COP27 & mulls over 3 signs of frothiness that disguise the true extent of physical climate risks

Climate bubble: govts, finance & corporates all displaying irrational exuberance – paying lip service to 1.5°C at COP27 but doing the opposite; still funding/expanding fossil fuels
At 1.2°C with no credible path to 1.5°C, fundamentals have shifted, finance must adjust or adapt for impacts from low emissions scenario TODAY not 2100; our future is here
Climate impacts don’t care about “story”; the bubble will burst. Wake up! Stress test to see “real risks”+fast-track systems-wide transformative adaptation to avoid hard landing

Irrational exuberance popularized by former Fed chair Greenspan refers to unfounded market optimism/enthusiasm that escalate asset values higher than fundamentally justified leading to asset bubbles which ultimately pop. This is what it feels like right now in the climate space – a large climate bubble is looming and it’s only getting bigger as we continue to ignore the true extent of physical climate risks.

Fundamentals have shifted but valuations haven’t

The UN now says that there’s no credible path to 1.5°C. UN Chief Antonio Guterres did not mince his words “we are on a highway to climate hell with one foot on the accelerator”. At 1.2°C of warming today, we are already 80% of our way to the aspirational Paris target of 1.5°C and 60% of the way to the 2°C threshold by 2100.

There is no credible path to 1.5°C, our 2100 climate future is here…

Fundamentals have shifted – this means that all underlying assumptions underpinning every financial model, every valuation, every investment decision should be adjusted to account for impacts from the low emissions scenario TODAY; not by the end of the century.

…fundamentals have shifted – this means we must adjust to account for impacts from the low emissions scenario today

This revaluation to “actual reality” would bring tectonic shifts to asset values across the world so of course it hasn’t happened. Instead, policymakers, bankers and corporates remain irrationally exuberant that we will somehow cut emissions drastically soon enough to dial back warming and rein in impacts. “Somehow” and “soon” have eluded us for decades and are still beyond our grasp, yet we hang on to hope, ignoring the “climate hell” that looms.

Sadly, we all know how this is going to end – we have seen it before. The heady mix of irrational exuberance and denial of fundamentals always leads to a huge market crash with millions losing their savings.

This time, the crash will be big enough to trigger systemic shocks across the world if the financial sector is not ready. Clustered risks from climate impacts can literally sink banks. Bankers must wake up to our new climate reality – the signs that we are standing at the edge of this exuberant precipice are made extra clear from COP27.

Here are 3 signs that if ignored could bring everything crashing down …

1. Our 2100 climate future is here but adaptation lags BIG time = 70 years behind yet funding is still nowhere near what it needs to be

The fact that we have already warmed by 1.2°C, means that climate impacts we expected to see with the target of 1.5°C by 2100 are already here today. With a 50:50 chance of breaching 1.5°C by 2026, a mere 4 years away, means that our late 21st century climate future is already here today.

Pakistan’s devastating floods, key rivers running dry in the Rhine, Po, Colorado & Yangtze running dry is a glimpse of what’s to come…

Climate driven events can cause whole countries to fail today not tomorrow. Take Pakistan – 33 million people have lost their homes as a third of the country still remains underwater after the devastating floods in the Indus River Basin. The dire straits faced by Pakistan give us a glimpse of what’s to come. Germany could lose the Rhine, Italy the Po, US the Colorado, China the Yangtze – sections of these rivers are already running dry today not tomorrow.

…seas are now rising faster – Fiji is planning to move the entire nation, & other island cities may have to follow

On top of this, seas are now rising faster than we think – Fiji is planning to move the entire nation; many more island nations and coastal cities may have to follow suit as our current policy path remains stuck at just under 3°C.

Hundreds of billions of dollars will be needed to adapt. Yet adaptation financing is still MIA; and yes the US$100bn promised to help vulnerable countries adapt is still not met, again – see how far off here.

As climate events inevitably compound, aid will run out … who will pay for all of this?

Clearly, Pakistan which only accounts for less than 1% of global emissions wants the global North who have eaten up the carbon budget to pay. Loss & damages were front and centre in Egypt but it is still all talk.

Yet US$100bn promised to help vulnerable countries adapt is still not met, again

While John Kerry said the US is “totally supportive” and is “100% ready” to discuss loss and damages, it looks like it will be delayed yet again with the aim to deliver concrete solutions by 2024 – so basically more talk for another 2 years. Meanwhile, Boris Johnson has straight out said that the UK cannot afford to pay climate change reparations We simply do not have the financial resources – and no country could.” New PM Sunak did not disagree with Boris.

Adaptation procrastination needs to stop & the Global South cannot rely on the North to help

Procrastinating over adaptation needs to stop. The Global South cannot rely on the North to help, it must help itself. Already on the highway to climate hell, we cannot afford to kick the conversation down the line for another 2 years; as it is we are already 70 years late in adapting.

What happens on adaptation will affect banks’ future liquidity and ability to lend as well as insurer’s ability to operate – see how HK can avoid double maximum risk here. The trade-offs are clear – don’t close the adaptation gap and revalue portfolios for impacts that are already baked-in OR spend on adaptation and continue to thrive – you don’t need to be a genius to make the right choice.

2. G7 still paying lip service to 1.5°C & net zero but doing the opposite = the story is more important than the work

Everyone says we must get to 1.5°C but governments, bankers and corporates are mostly continuing on a carbon intensive path. On the government front, it’s not just the usual “naughty” suspects of China and India that are expanding coal/oil and gas but also the morally perched G7.

UK PM Rishi Sunak was the personification of paying lip service and doing the opposite at COP27. On stage he said “abhorrent war in Ukraine and rising energy prices across the world are not a reason to go slow on climate change. They are a reason to act faster,” A great sound bite that was feted by global media including the New York Times.

Few bothered to highlight that the UK, after having hosted COP26 in Glasgow is now granting 100+ new oil & gas licences in the North Sea. At least the Guardian published scathing opinions.

The UK is granting 100+ new oil & gas licences in the North Sea, Germany is re-opening its coal plants & Japan spent ~US$2.6bn worth of fossil fuels from Russia…

It’s not the talk but action that counts. Germany is re-opening its coal plants, Japan has spent an estimated US$2.6bn worth of fossil fuels from Russia from the start of the war till July 2022. And shocker… Whilst Kerry is telling everyone they’re not decarbonizing fast enough, President Biden approved more oil and gas drilling permits on public lands per month than Trump in his first 3 years of presidency.

Numbers don’t lie – the latest EIA outlook has US crude oil production averaging 11.7mn b/d (barrels per day) in 2022 going up to 12.4mn b/d for 2023; surpassing the record high of 12.23mn b/d in 2019 under Trump.

…US crude oil production has surpassed record high, even “clean” Norway is opening up new coal plant fields

Even “clean” Norway is opening up new fields in the North Sea – it has drilled 17 exploration wells in 1H2022 and is set to drill another 18-23 more this year. The revenues of which will continue to fund its “greener than thou” sovereign fund which led a de-coal drive across its portfolio. Surely this is the very definition of greenwashing?

Sure, we can blame the Russia/Ukraine war for this fossil fuel spree but with no end in sight (as no one is at the negotiation table), it looks like this oil splurge will continue – accelerating all our paths to climate hell.

But China’s emissions have now fallen year-on-year for 4 consecutive quarters? – more than the emissions of the entire UK

So is anyone doing the heavy lifting? Apparently China is. According to Carbon Brief, China’s carbon emissions have now fallen year-on-year for four consecutive quarters – “by some 380MtCO2 across the 12 months from July 2021 through to June 2022”.

Now that’s a sizeable reduction – for perspective, 380MtCO2 is more than the carbon emissions of the entire UK. No wonder President Xi did not have to turn up at COP to “blah blah blah” – he’s actually doing the work.

Ah … but we forget, no one likes to talk about actual work, it’s “the story” that matters.

So it seems that the Global North will continue on the path of pretending that they did not eat up the carbon budget. In this denial, they will shirk their responsibilities to fully pay up on loss & damages. They will continue to pat each other on the back for pledging but not taking timely action.

Worst still is that the press is complicit – instead of calling out hypocrisies, it sells the “story” facilitating irrational exuberance and feeding the ever growing climate bubble.

But surely seasoned bankers/c-suite execs are not naïve and can see through this?

3. Eyes wide shut! Finance & corporates are banking on wishing thinking + ignoring climate science

A new report “Still Flying Blind: The Absence of Climate Risk in Financial Reporting” released by Carbon Tracker is aptly titled. According to the report, despite a significant majority having targets/ambitions to reach net zero by 2050 or sooner, “no company used assumptions and estimates that were aligned with achieving net zero” within this time line.

In short, they are just paying lip service to net zero pledges. But are they therefore acknowledging the rise of climate risks as a result of no clear path to net zero? Apparently not.

New report shows majority of countries have targets but they are just paying lip service to net zero pledges…

The 134 highly carbon-exposed companies surveyed by Carbon Tracker from fossil fuel, mining, manufacturing, and automotive sectors, provided little evidence that they had considered the impacts of material climate-related matters in preparing their financial statements. So most companies are still neither including the financial impacts of their net zero commitments nor climate change risks in their financial statements.

…& 134 highly carbon-exposed co’s have barely considered material climate impacts in preparing their financial statements

Basically, they are still flying blind. Not decarbonizing plus not recognizing the physical risk is a lethal combination that could sink banks as many chronic climate risks override traditional risk management methods. Yet bankers are also complicit, with some banks happily pouring money into fossil fuels/ carbon intensive industries escalating physical risks.

It appears that seasoned bankers/c-suite execs have also fallen prey to irrational exuberance. They are all banking on wishful thinking that tech, that we have not yet invented/perfected, will save us. This reliance on future tech/our ability to “invent stuff” have lulled us into a false sense of security.

So what if we overshoot 1.5C? Surely, we can always bring it back with new tech that will be invented in the future – sadly not, our planet does not work that way. We cannot “undo” some things like sea level rise.

Bankers/c-suite execs are all banking on wishful thinking that not yet invented or perfected tech will save us

Never mind the stuff that we have not yet perfected, there is plenty of tech that already works today that could help fast track the transition to a low carbon economy. Where are we on that? The good news is that global renewable expansion is up – according to a BNEF report, US$226bn was invested in renewables in 1H2022.

Again, China is doing most of the work on this front – it is driving global renewable expansion accounting for 43% of the total spending. Already in the first half of 2022, China spent US$58bn on wind (up a whopping 173% from the year before) and US$41bn on large-scale solar (up 107% y-o-y).

Certainly, China’s nearly US$100bn investment in renewables in 1H22 makes the US’s $369bn for renewable energy, zero carbon transportation, clean manufacturing, community resilience, and natural climate solutions under the much touted Inflation Reduction Act look light.

We can and we must all do more, especially the financial sector which prides itself in identifying bubbles. The paradigm shift has already happened – we are now operating in a 1.5C world. All assets/investments must be re-evaluated against this new risk lens. Telling a good story or banking on future inventions is not going to cut it. We actually have to adapt and decarbonize with equal ferocity.

Climate change impacts don’t follow the “story” but science, we must embrace the shift in fundamentals & start futureproofing systems

Climate change impacts do not follow the “story” but science. It’s time we stop denying and embrace the shift in fundamentals for only then can we start to futureproof our systems. No more flying blind – to see the “real risks” ahead on our highway to climate hell, we must stress test right to avoid a hard landing – our latest report shows you how

The game has changed – have you adjusted?

The warning signs are all here. Our future is today – game changing climate events are upon us today – the chronic risk landscape is already shifting – rivers running dry could sink economies if not adapted; rapid sea level rise could sink banks.

There will be no cover as insurers can pull out anytime leaving banks and corporates as the last bearer of risk. There will be no warning either as premiums are renewed annually.

The warning signs are all here – the chronic risk landscape is already shifting…

As the climate bubble looms and grows, we can all continue to pretend it is not there but as our top cryosphere scientists warned, we cannot negotiate with the melting point of ice. We have set off melt at “rates unthinkable just a decade ago”, and nearly all these impacts “are irreversible on human timescales”. Get updated on ice here & here.

…& at the rate we are going, the climate bubble will burst sooner than later…

At the rate we are going, the climate bubble will burst sooner than later. We must be ready – only systems-wide transformative adaptation can buffer us from country, economic and financial systems collapse. With every crash, there will be winners and losers – you have been warned – which side you end up is up to you. Wake up.

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Debra Tan
Author: Debra Tan
Debra heads the CWR team and has steered the CWR brand from idea to a leader in the water risk conversation globally. Reports she has written for and with financial institutions analyzing the impact of water risks on the Power, Mining, Agricultural and Textiles industries have been considered groundbreaking and instrumental in understanding not just China’s but future global water challenges. One of these led the fashion industry to nominate CWR as a finalist for the Global Leadership Awards in Sustainable Apparel; another is helping to build consensus toward water risk valuation. Debra is a prolific speaker on water risk delivering keynotes, participating in panel discussions at water prize seminars, numerous investor & industry conferences as well as G2G and academic forums. Before venturing into “water”, she worked in finance, spending over a decade as a chartered accountant and investment banker specializing in M&A and strategic advisory. Debra left banking to pursue her interest in photography and also ran and organized philanthropic and luxury holidays for a small but global private members travel network She has lived and worked in Beijing, HK, KL, London, New York and Singapore and spends her spare time exploring glaciers in Asia.
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