switzerlanden
Global warming: a systemic risk

Global warming: a systemic risk

26-09-2016 | Insight

Global warming will become worse, before it hopefully becomes better, says Chief Economist Léon Cornelissen.

Would you like to read the full report?
Would you like to read the full report?
Download 'Expected Returns 2017-2021'

Speed read

  • Climate change will impact politics, macroeconomics and financial markets.
  • The world will only slowly reduce its dependency on fossil fuel.
  • Thus positive benefits of new low carbon economy will take longer to materialize.

“The scientific consensus is that global warming will become worse, before it hopefully becomes better”, says Léon Cornelissen, Robeco’s Chief Economist. “One reason for optimism is the fact that heightened global concerns surrounding this phenomenon have now resulted in the ambitious COP21 Paris Agreement.”

“Global warming“, he adds, “also implies global ‘weirding’, i.e. more extreme weather events. This not only means drought like those recently experienced in Australia, where meteorologists had to search for new colors for their weather maps, or the summer wildfires of Siberia and the current drought in California.”

“But it could also mean – somewhat paradoxically – more severe winters as a consequence of a seasonal change in the path of the so-called ‘jet stream’ or a southerly bend in the Gulf Stream which is currently responsible for the mild sea climate in northwest Europe. Climate change will have an impact on politics, macroeconomics and on financial markets”, according to Cornelissen.

Impact on expected returns

What will global warming mean for expected returns on asset classes? “The most significant physical impacts of climate change will become evident in the second half of this century”, says Cornelissen. “But the consequences for forward-looking asset markets could become apparent far earlier. When future expectations in terms of climate change are adjusted, markets and prices will reflect this, possibly long before the physical changes of global warming make themselves felt.”

“The macroeconomic impact of climate change will be heavily influenced by the environmental policies pursued. It is impossible to calculate the impact with any degree of certainty, but of course we can sketch very rough and highly stylized scenarios.”

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates
Subscribe

Most benign scenario

“The most benign scenario consists of a rapid shift from a fossil-fuel based world economy to a low-carbon one. This will demand a tremendous investment in new capital infrastructure, research and development and new business models. The shift will be costly and lead to a short-term period of high volatility and slow growth. According to HSBC, nearly half the coal and oil assets will become stranded (essentially worthless)”, according to Robeco’s Chief Economist.

‘Nearly half the coal and oil assets will become stranded’

How could such a scenario best be achieved? “A combination of a global carbon tax, the introduction of carbon budgets, a hefty increase in investments in low-carbon technologies and an end to investments or subsidies for fossil-fuel extraction could do the trick”, replies Cornelissen. “Yet a more plausible scenario is a world where past trends basically continue, with temperatures rising by 2-2.5˚C by 2100. The world will succeed in slowly reducing its dependency on fossil fuel. The flip side is that it will take longer before the positive benefits of the new low carbon economy will start to accrue.”

Silver linings

Meanwhile, are there any silver linings at the horizon? “An international study suggests that the seasonal ‘ozone hole’ which forms over Antarctica every spring has shrunk by an area equivalent to the size of India since 2000. This improvement can be attributed to the gradual decline in the use of atmospheric chlorofluorocarbons (CFCs) as a direct result of the Montreal Protocol of 1987 (30 years ago), which committed the world to rapidly phase out CFCs”, says Cornelissen.

“Ironically, it was the decisive leadership of the free market enthusiasts Ronald Reagan and Margaret Thatcher that generated extensive new restrictions on industry. We have saved the planet once, so let’s do it again, the Financial Times recently noted referring to this successful example in the fight to tackle climate change.”

“We have saved the planet once, so let’s do it again”

One of the greatest market failures known to man?

“For an economist it is tempting to describe climate change as one of the greatest market failures known to man. There is no effective price on carbon to reflect the external effects of the ever higher atmospheric concentrations of carbon emissions that increase climate risk. Moreover, these risks will largely be borne by future generations. Still, it is far too early to despair. The fact that thirty years ago effective steps were taken via an international agreement to dispel the ozone crisis, also give us hope for the future.”

Would you like to read the full report?
Would you like to read the full report?
Download 'Expected Returns 2017-2021'
Subjects related to this article are:
Logo

Disclaimer Robeco Switzerland Ltd.

The information contained on these pages is for marketing purposes and solely intended for Qualified Investors in accordance with the Swiss Collective Investment Schemes Act of 23 June 2006 (“CISA”) domiciled in Switzerland, Professional Clients in accordance with Annex II of the Markets in Financial Instruments Directive II (“MiFID II”) domiciled in the European Union und European Economic Area with a license to distribute / promote financial instruments in such capacity or herewith requesting respective information on products and services in their capacity as Professional Clients. 

The Funds are domiciled in Luxembourg and The Netherlands. ACOLIN Fund Services AG, postal address: Affolternstrasse 56, 8050 Zürich, acts as the Swiss representative of the Fund(s). UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zurich, postal address: Europastrasse 2, P.O. Box, CH-8152 Opfikon, acts as the Swiss paying agent. The prospectus, the Key Investor Information Documents (KIIDs), the articles of association, the annual and semi-annual reports of the Fund(s) may be obtained, on simple request and free of charge, at the office of the Swiss representative ACOLIN Fund Services AG. The prospectuses are also available via the website www.robeco.ch. Some funds about which information is shown on these pages may fall outside the scope of the Swiss Collective Investment Schemes Act of 26 June 2006 (“CISA”) and therefore do not (need to) have a license from or registration with the Swiss Financial Market Supervisory Authority (FINMA). 

Some funds about which information is shown on this website may not be available in your domicile country. Please check the registration status in your respective domicile country. To view the RobecoSwitzerland Ltd. products that are registered/available in your country, please go to the respective Fund Selector, which can be found on this website and select your country of domicile. 

Neither information nor any opinion expressed on this website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco Switzerland Ltd. product should only be made after reading the related legal documents such as management regulations, prospectuses, annual and semi-annual reports. 

By clicking “I agree” you confirm that you/the company you represent falls under one of the above-mentioned categories of addressees and that you have read, understood and accept the terms of use for this website.

I Disagree