Prior to the world climate protection agreement in December 2015 in Paris (COP21) some first institutional investors reduced their stocks they had invested in firms, that are highly depending on fossil resources and energy. Meanwhile a growing discussion among financial markets participants evolved about the possible impacts of a carbon bubble and the thread of stranded assets to their portfolios. More and more it is accepted, that financing directly and indirectly is jointly responsible for global greenhouse gas emissions (financed emissions), global warming and induced adverse environmental impacts. The intended reduction of greenhouse gas emissions by political actions due to COP21 will require severe adjustments in firms and markets. It will be accompanied by market price risks for stocks of those firms affected mostly by climate-friendly regulations and subsequently for investors, financial markets and financial centers. As such risks are caused by greenhouse gas emissions of fossil resource consumption they are called investment carbon exposures.
The following contribution demonstrates the possible financial losses for those who are invested in stocks and mutual investment funds traded at the financial center of Frankfurt, if new regulations would occur in order to achieve the two degree target, manifested in the Paris agreement. The Emission Trading System (EU-ETS) of the European Union plays a crucial role in such a regulation as it was agreed by COP21. The necessary reforms of the EU-ETS are not yet finalized and the resulting future price level for emission allowances is still not determined on a reliable basis.
The research report is based on detailed climate impact assessment data provided by South Pole Group and yourSRI.