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Why investors should pay attention to COP26 climate talks

<i>Frederic J. Brown/AFP/Getty Images</i><br/>Experts are warning that the climate crisis could trigger the next financial meltdown. The oil platforms named Ellen (L) and Elly (R) are seen off the southern California coast on October 6
AFP via Getty Images
Frederic J. Brown/AFP/Getty Images
Experts are warning that the climate crisis could trigger the next financial meltdown. The oil platforms named Ellen (L) and Elly (R) are seen off the southern California coast on October 6

By Julia Horowitz, CNN Business

As world leaders gather in Glasgow for the COP26 climate summit on Sunday, there are plenty of reasons for companies and investors to watch closely.

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

“The climate crisis is slow in the making, but it’s potentially disastrous,” Tobias Adrian, a senior International Monetary Fund official, told CNN Business earlier this year, noting that global warming could “absolutely” ignite a financial crisis, too.

Earlier this month, the US Financial Stability Oversight Council pointed to climate change “as an emerging and increasing 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 is only poised to get worse in the years ahead. Companies could see their assets destroyed — or be left with dwindling or worthless portfolios as government policies change, as well as investor and consumer attitudes.

It’s a debate already playing out across the oil industry. Currently, there’s demand for nearly 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 partner scientists have warned that the world needs to “immediately and steeply” pare back on fossil fuel production.

If output is curtailed and demand drops as money is poured into renewable sources of energy, what happens to the value of the vast network of firms and infrastructure dedicated to pumping oil from the ground?

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

“People are trying to get their money back earlier, 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’re not making 10, 20-year bets.”

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

See here: Over 70% of some of world’s top corporate emitters didn’t disclose the effects of climate risk in 2020 financial statements, according to an analysis by Carbon Tracker, a London-based think tank.

“Without this information there is little way of knowing the extent of capital at risk, or if funds are being allocated to unsustainable businesses,” said Barbara Davidson, the report’s lead author.

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

Proposed legislation would apply to many of the largest traded companies 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 from countries around the world are calling for negotiators at COP26 to discuss a way to streamline disclosures so companies can work within a consistent framework.

“Nearly all 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 sign of easing soon.

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

The latest: The Fed’s preferred measure of US inflation, the Personal Consumption Expenditures price index, showed Friday that inflation jumped 4.4% in the year through September, its biggest leap since 1991. Excluding food and energy costs, prices climbed 3.6%.

That could bolster the Fed’s resolve to act at its meeting this week.

Investors are betting that after months of speculation, the Federal Reserve will start rolling back bond buying aimed at helping the economy during the pandemic. They expect asset purchases to be reduced by $15 billion each month, with the taper process wrapping up by June.

“A [Wednesday] taper announcement looks a forgone conclusion,” ING strategists including James Knightley, the bank’s chief international economist, said in a recent note to clients.

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

“The next several months are critical for assessing whether the high inflation numbers we have seen are transitory,” Fed Governor Christopher Waller said earlier in October. “If monthly prints of inflation continue to run high through the remainder of this year, a more aggressive policy response than just tapering may well be warranted in 2022.”

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

Up next

Monday: US and China manufacturing data; Avis and Clorox earnings; Web Summit kicks off in Lisbon

Tuesday: BP, ConocoPhillips, Corsair Gaming, Ferrari, Marathon Petroleum, Pfizer, Under Armour, Activision Blizzard, Lyft and Zillow earnings

Wednesday: Federal Reserve policy decision; ISM Non-Manufacturing Index; CVS, Marriott, Etsy, Fox Corporation, Hyatt and Qualcomm earnings

Thursday: OPEC+ meeting; Bank of England policy decision; Kellogg, Nikola, ViacomCBS, Live Nation, Occidental, Peloton, Pinterest, Redfin, Square and Uber earnings

Friday: US jobs report; Cinemark and DraftKings earnings

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