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UK's high carbon investment risk questioned

by Adrian Bishop 19 Jan 2012
UK's high carbon investment risk questioned

City of London via Shutterstock

A group of top influencers have urged the Bank of England to investigate if high carbon investments endanger UK finances. The 20 groups of environmental experts, investors, academics and politicians call on Governor, Sir Mervyn King to examine whether Britain's exposure to polluting and environmentally damaging investments might pose a systemic risk to the financial system and economic security.

In an open letter, they ask if Britain's high carbon investments create an increased risk as the country nears set limits.

The letter says, "As the Financial Policy Committee develops its forward work programme, we urge it to investigate how the UK's exposure to high carbon investments might pose a systemic risk to our financial system and what the options might be for managing this potential threat to our economic security.

"The depth and breadth of our collective financial exposure to high carbon, extractive and environmentally unsustainable investments could become a major problem as we transition to a low carbon economy.

"Five of the top ten FTSE 100 companies are almost exclusively high carbon and alone account for 25% of the index's entire market capitalization."

Regulators do not check on how many high carbon investments Britain possesses and have no limit in place, the letter says.

Ben Caldecott, Head of Policy at Climate Change Capital, which is one of the signatories, says, "We need to prevent the deep and profound harm that could be wrought by an over-exposure to high carbon assets and a rapid shift in their values.

"Unlike sub-prime mortgages before the financial crisis, this time regulators must act to prevent the build-up of systemic risk in our financial system."

As profits in oil, coal, gas and other high carbon industries are cut by policy decisions, pension funds and other large investors could receive dwindling returns, the letter warns.

Many investors are forced into buying high carbon assets because of the high demand for capital in funds that follow the main indices, the need for liquidity and the tracking of required market performance.

New regulations, like Basel III and Solvency II, make it easier for them to invest in these areas, rather than long-term, low carbon opportunities.

"In such situations we believe that regulators have a role to play in protecting investors from systemic risk," the letter states.

To discover how big the problem is, the focus must be on British and European exposure to high carbon risk, but the worldwide position must also be understood.

How the transition from high to low carbon investments must affect the financial system, must also be investigated.

"The purpose of this work should be to evaluate the health, soundness and vulnerabilities of the financial system as we proceed with a low carbon transition, the letter says.

"After these studies are completed, we need to develop a strategy that could manage the challenges that might arise as a result of an over-exposure."

Among those who have signed the letter are Climate Change Capital, FairPensions, Lord Gummer, Zac Goldsmith MP, UK Sustainable Investment and Finance Association, Carbon Disclosure Project, WWF-UK, Greenpeace UK, The Climate Group, E3G, The Green Alliance, Oxford University's Smith School of Enterprise and the Environment, Carbon Tracker Initiative, the London School of Economics and Anglia Ruskin University's Global Sustainability Institute.

James Cameron, from the Prime Minister's Business Advisory Group, says, "Counter intuitively, investors continue to pour cash into unsustainable high carbon assets without understanding or being able to manage the risks associated with these investments, such as climate change, local pollution, fossil fuel price volatility, political risk and catastrophes such as Deepwater Horizon.

"This poses significant strategic challenges for the future prosperity of Britain that just can't be ignored."

John Sauven, Chief Executive of Greenpeace UK, says, "The ongoing addiction of UK institutional investors to big oil and coal no longer offers the security many of their investors demand.

"These large investment groups and major banks need to turn away from the risks underpinning environmentally damaging dirty fuels and instead take this opportunity to look at ways they can use the huge sums they have available to support the UK and world's emerging clean technology markets."

David Nussbaum, WWF-UK's Chief Executive, adds, "There are significant long term financial and environmental risks associated with high carbon investments, and policymakers and regulators need a thorough appreciation of these.

"It's clear that we cannot burn all the fossil fuels currently listed as assets on the world's financial markets without seriously impacting the value of other listed assets - which would affect the future pensions on which we'll all depend. Taking the high carbon risks seriously should also assist us in the transition towards low carbon investments like renewables."

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