Climate Bubble! COP27, irrational exuberance & flying blind

Climate Bubble! COP27, irrational exuberance & flying blind – COP disappoints and fundamentals have shifted but valuations haven’t and thanks to irrational exuberance, a large climate bubble looms. So, this month we highlight signs of an imminent crash and how 17 APAC banks face triple whammy concentrated risks from rising seas as insurers in New Zealand say they won’t pay for coastal threats. We also look at how Hong Kong can avoid double blind maximum risk and what investors need to ask.

With no credible path to 1.5°C by 2100, fundamentals have shifted – finance must adjust OR adapt for impacts from low emissions scenario TODAY not 2100; our future is here. Let’s face it, at 1.2°C of warming today, we are already 80% of our way to the aspirational Paris target of 1.5°C and 60% of the way to the 2°C threshold by 2100.

This means all underlying assumptions underpinning every financial model, every valuation and every investment decision must change. This revaluation to “actual reality” would bring tectonic shifts to asset values across the world so of course it hasn’t happened. Instead world leaders, finance and corporates all display irrational exuberance – paying lip service to 1.5°C at COP27 but doing the opposite by funding/expanding fossil fuels.

Sadly, we all know how this is going to end. This time, the crash will be big enough to trigger systemic shocks across the world if the financial sector is not ready. Check out 3 signs, that if ignored, could bring everything crashing down.

Bankers must wake up to our new climate reality. To fast-track this we released a report, “Futureproofing APAC Banks & Savings: Stress test right today, avoid hard landing from rising seas”.

It finds that of the 17 APAC banks analysed, around US$5trn or almost two-thirds of loan books are exposed to escalating sea level rise risks. Plus, with 200 million people in APAC at risk from just 1 meter of sea level rise, the stakes are high.

So, APAC banks and central banks/regulators must stress test right today to stay afloat tomorrow. To see how banks including HSBC, Standard Chartered, DBS, Commonwealth Bank of Australia, the Mitsubishi UFJ Financial Group and KB Financial are doing, check out the factsheets in the report. Also, be sure to read the stress-testing guide.

The Hong Kong case study, as part of the report, shows just how bad it will be if banks don’t “see” the real risk. How many more properties will be flooded if we continue on the 3°C path? Are the levels of rising seas HK is adapting for enough? And how exposed are HK banks? See here.

Let’s be clear, 2-3 meters of sea level rise by 2100 is not guaranteed but our current direction of travel isn’t imbuing any optimism. The new State of the Cryosphere 2022 report is also depressing – “Our global ice stores are receding at rates unthinkable just a decade ago”.  All these signs point to a hard landing. We walk you through how we can steer away from systems collapse.

Over in New Zealand sobering data on sea level rise shows water is now lapping close to a lot of front doors but who will pay when coastal threats cross the threshold? Insurers say not them, meaning 30,000 homes (NZ$17bn) will be uninsurable in the coming decades.

What can New Zealand do? Why are properties still being built in high risk zones and who is responsible? Lecturer of Civil Systems Engineering from UoC, Tom Logan, expands.

As “no insurance” looms, banks’ risks rise. Systemic shocks may be sooner than you think as insurers can pull out anytime leaving banks and corporates as the last bearer of risk. There will be no warning either as premiums are renewed annually. All the more reason to stress test right today!

With climate risks escalating, it’s important for investors to ask the right questions. Climate Action 100+ has launched an updated investor guide for engaging in Asia. See how they applied the benchmark in Asia and the stages of transition they work with.

The Guide also provides practical guidance on the actions companies might take (and which investors might encourage) to meet the expectations of the Benchmark. Cosmo Hui, AIGCC’s Engagement Manager, shares key highlights.

Last year, we said that COP26 points to a dire future for water.  Sadly, COP27 is no better. It was an emporium of mostly false hope – in fact things are looking worse  as UN Chief Guterres aptly said  “we are on a highway to climate hell with our foot on the accelerator.” In case you have not been following, check out our 5 key takeaways.

While COP27 was far from its promise to be “the ‘Implementation COP”, at least  the loss and damage fund was tabled. Other than that, we are still on the highway to climate hell with a current policy path of 2.7-2.8C by 2100. This means multi-meter SLR sooner rather than later.

The warning signs are all here. Our 2100 climate future is here now – game changing climate events are upon us today – unless we adapt, rivers running dry and accelerating sea level rise could sink economies and banks.

As the climate bubble looms and grows, we can all continue to pretend it is not there but as our top cryosphere scientists warned, “we cannot negotiate with the melting point of ice”.

At the rate we are going, this bubble will burst sooner than later. With every crash, there will be winners and losers – you have been warned – which side you end up on is up to you.