Download this Paper Open PDF in Browser

The Case for Forceful Stewardship (Part 1): The Financial Risk from Global Warming

23 Pages Posted: 19 Jan 2015  

Howard Covington

Cambridge University, Isaac Newton Institute for Mathematical Sciences

Raj Thamotheram

University of Oxford - Smith School of Enterprise and the Environment; Preventable Surprises

Multiple version iconThere are 2 versions of this paper

Date Written: January 19, 2015

Abstract

If it reaches 4° or more, global warming may cause severe economic damage with the consequence that a significant portion of the value of a diversified equity investment portfolio will be placed at risk.

In this Part 1 we analyse this risk. We estimate that in a plausible worst case for climate damage the value at risk in 2030 may be equivalent to a permanent reduction of between 5% and 20% in portfolio value compared to what it would have been without warming. This risk can be substantially lowered by a rapid energy transition to reduce greenhouse gas emissions.

In the accompanying Part 2 we explore the actions investors should take to reduce risk. Long-term investors should consider doing whatever they reasonably can to bring a rapid energy transition about and investment fiduciaries may have an obligation to do so. Possible action includes voting for resolutions to change constructively the business strategies of the companies in which they are invested, particularly the fossil fuel companies. The resulting collective action problem may be solved if pension scheme members and other beneficiaries test legally the obligations of their investment fiduciaries in this regard. We call this assertive approach by investors to taking action to reduce climate risk ‘Forceful Stewardship’.

Keywords: Climate change, collective action problem, corporate governance, diversified portfolio, engagement, fiduciary capitalism, fiduciary obligations, forceful stewardship, global warming, greenhouse gases, investment fiduciaries, long-term investing, systemic risk, universal ownership, value at risk

JEL Classification: A13, C71, D21, D62, G12, G23, G30

Suggested Citation

Covington, Howard and Thamotheram, Raj, The Case for Forceful Stewardship (Part 1): The Financial Risk from Global Warming (January 19, 2015). Available at SSRN: https://ssrn.com/abstract=2551478 or http://dx.doi.org/10.2139/ssrn.2551478

Howard Covington

Cambridge University, Isaac Newton Institute for Mathematical Sciences ( email )

Cambridge, CB3 9DD
United Kingdom

Raj Thamotheram (Contact Author)

University of Oxford - Smith School of Enterprise and the Environment ( email )

United Kingdom

Preventable Surprises

London
United Kingdom

HOME PAGE: http://www.preventablesurprises.com

Paper statistics

Downloads
796
Rank
12,315
Abstract Views
6,193