Why investors should pay attention to the COP26 climate talks

Here’s just one: Experts warn that the climate crisis could trigger the next financial meltdown.

“The climate crisis is slowly brewing, but it is potentially disastrous,” said Tobias Adrian, a senior official at the International Monetary Fund, told CNN Business earlier this year, pointing out that global warming could also “absolutely” trigger a financial crisis.
Earlier this month, the US Financial Stability Oversight Board singled out climate change “as an emerging and growing threat to US financial stability.” for the first time.

Breaking it down: It’s no secret that extreme weather events linked to higher temperatures are already imposing significant economic costs. But the problem will only get worse in the coming years. Businesses could see their assets destroyed, or be left with dwindling or worthless portfolios as government policies change, as well as the attitudes of investors and consumers.

It is a debate that is already developing in the oil industry. Currently, there is a demand for almost 100 million barrels of oil per day. But to limit warming to 1.5 degrees Celsius and avoid the worst effects of the climate crisis, the United Nations and associated scientists have warned that the world needs to “immediately and dramatically” reduce fossil fuel production.

If production is reduced and demand falls as money is poured into renewable energy sources, what happens to the value of the vast network of companies and infrastructure dedicated to pumping oil from the ground?

Investment in the sector is beginning to favor shorter-term projects, the result of uncertainty about the future.

“People are trying to get their money back sooner, so long-term dislocation becomes less of a risk for them,” Nikos Tsafos, an energy and geopolitics expert at the Center for Strategic and International Studies, told me. “They are not making bets on 10 or 20 years.”

Still, there is growing concern that investors may not be aware of how much of a company’s balance sheet is sensitive to the climate crisis, triggering a push for further disclosures.

See here: More than 70% of some of the world’s top corporate issuers did not disclose the effects of climate risk on their 2020 financial statements, according to an analysis by Carbon Tracker, a London-based think tank.

“Without this information, there are few ways to know the extent of the capital at risk, or if the funds are being allocated to unsustainable businesses,” said Barbara Davidson, lead author of the report.

The UK government said last week It plans to be the first major economy to legally require corporations to report climate-related risks and opportunities.

The proposed legislation would apply to many of the largest companies listed on the London Stock Exchange, banks and insurers, as well as private companies with more than 500 employees and £ 500 million ($ 690 million) in sales.

Watch this space: Business lobbyists in countries around the world are asking negotiators at COP26 to discuss a way to simplify disclosures so companies can work within a consistent framework.

“Almost all of our members lead companies that have operations around the world,” the groups said in a statement last week. “We support better alignment of climate change disclosure standards, developed with input from industry, investors and standard setters.”

Is the Fed finally ready to pull the trigger?

Inflation is rising at the fastest rate in three decades and shows no signs of abating anytime soon.

Enter the Federal Reserve, which might be ready to make a move after months of emphasizing that it didn’t want to jump the gun.

The latest: The Fed’s preferred measure of US inflation, the personal consumption expenditure price index, showed on Friday that inflation rose 4.4% in the year to September, its biggest jump since 1991. Excluding the food and energy costs, prices rose 3.6%.

That could reinforce the Fed’s determination to act at its meeting this week.

Investors are betting that after months of speculation, the Federal Reserve will begin to reverse bond purchases with the goal of helping the economy during the pandemic. They expect asset purchases to decline by $ 15 billion each month, with the downsizing process to end in June.

“TO [Wednesday] The reduction announcement seems like a forgotten conclusion, “ING strategists, including James Knightley, the bank’s chief international economist, said in a recent note to clients.

The great debate is now over when the Fed could start raising interest rates.

“The next few months are critical to assess whether the high inflation figures that we have seen are transitory,” Fed Governor Christopher Waller said in early October. “If monthly inflation impressions continue to be high for the rest of this year, a more aggressive policy response than a simple reduction may be justified in 2022.”

A fifth of investors now think the Fed will start raising rates in March next year, according to CME Group FedWatch Tool. That increases to more than two-thirds in June. Not long ago, the consensus was that rate hikes wouldn’t start until 2023.

Until next time

Monday: US and China manufacturing data; Avis (CAR) and Clorox (CLX) Profits; The Web Summit begins in Lisbon
Tuesday: BP (BP), ConocoPhillips (POLICEMAN), Corsair Gaming Ferrari (RACE), Oil marathon (MPC), Pfizer (PFE), Under armor (UA), Activision Blizzard (ATVI), Lyft (LYFT) and Zillow (Z) Profits
Wednesday: Federal Reserve Policy Decision; ISM Non-Manufacturing Index; CVS (CVS), Marriott (SEA), Etsy (ETSY), Fox Corporation (FOX), Hyatt (H) and Qualcomm (QCOM) Profits
Thursday: OPEC + meeting; Bank of England policy decision; Kellogg (K), Nikola, ViacomCBS (VIACA), Living nation (LYV), Western (OXY), Platoon (PTON), Pinterest (LEGS), Redfin (RDFN), Square (SQ) and Uber (UBER) Profits
Friday: US Employment Report; Cinemark (CNK) and DraftKings earnings


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