relative to 1850–1900 (IPCC AR6 WGI)
“It’s the temperature, stupid”
The summer of 2021 will be remembered as the hottest season. In hotter weather than usual, a mask covering the nose and mouth raises our body temperature and lowers our activity. When going out of the house, the temperature is measured on the forehead or wrist at entering the building, and if it is 1.0℃ higher than the known body temperature, your access is often controlled.
Meanwhile, according to the 6th report of the Intergovernmental Panel on Climate Change (IPCC) released in early August, it warns that the average global temperature has risen by 1.1°C until now (2010–19) since the late 19th century(1850–1900) at a level comparable to that of pre-industrial times. And it is said that the time of reaching 1.5℃ will be in the early 2030s, ten years earlier than before.
In addition to the alarm of +1.0°C in body temperature and the threat of +1.1°C on Earth, the climate change we will face as the Earth warms by 0.4°C in the future will be much harsher and more difficult. That is why governments, businesses, and individuals must act immediately to achieve net-zero (carbon-neutral) greenhouse gas emissions.
However, it is still difficult for the whole world to speak out and expect a single action to alleviate the global catastrophe caused by climate warming. There are crossroads all over the place. Nevertheless, we should select one of the coordinates of the present cost (x) and the future loss (y) under the premise that “the greater the present cost, the less the future loss.” And in the process of reaching the chosen coordinates, economic entities will have to play their respective roles properly, aiming for an eco-friendly lifestyle for individuals, a carbon-neutral business model for companies, and a sustainable green economy for the government.
There is no doubt that climate change is a significant challenge to the global economy over the next decade and will increase uncertainty in the financial system. For the past one or two years, many central banks in major developed countries have recognized climate change as a risk. In line with this, they are accelerating model development and impact analysis for the ‘climate stress test.’ That’s why the central bank also believes that supporting the private sector’s response to climate change, a global issue from a long-term perspective, rather than being complacent with the traditional goal of price stability on a two- to a three-year horizon, contributes to macroeconomic stability.
The central bank-led climate stress test will prompt financial institutions such as banks and insurance to participate, bringing together carbon prices, carbon emissions routes, physical disaster risk, and macroeconomics into a framework for a consistent view.
Meanwhile, the risk of climate change, along with physical risks, will also affect asset investment value and corporate credit ratings with several technical and policy choices (transition risks) to reduce carbon emissions. In other words, carbon-emitting sectors (traffic, building, manufacturing and construction, and electricity production) are expected to see lower stock prices and higher default rates of related companies as production costs rise and value-added decrease. This would, in turn, deteriorate the soundness of lending institutions and reduce the profitability of investment management institutions.
We will leave a carbon footprint in many of our activities in the future and sometimes trace. Accordingly, carbon emissions will also be measured separately. For example, if the company emits directly, if the company emits indirectly from the energy it consumes for its business, or if it is indirectly emitted outside the company through the supply chain, etc.
Carbon emissions will also be an important determinant in evaluating the portfolio value of the stocks and bonds we invest in. In a prospectus or investment analysis report, you will come across the term “carbon intensity,” which compares carbon emissions with the amount of investment or the sales and profits of the invested company.
Just as investment portfolios include credit rating information, they will also be given “the temperature rating of a portfolio,” indicating long-term temperatures linked to carbon reduction targets. For example, a portfolio temperature grade that reduces the annual target carbon emission by 4% by 2030 is 1.9°C, and a portfolio temperature grade that reduces carbon emission by 50% per revenue generated by 2030 is 2.1°C, which is expressed as a single number.
Just as our human activities have raised the Earth’s surface temperature steeply over the past 100 years, new viruses might be afraid to further raise our bodies’ temperature. What is clear, however, is that the investment portfolio is heating up by 2030. It’s the temperature, stupid.
