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Merrill: Climate Change Could Cause ‘Unprecedented Damage to Financial Stability’

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It’s not just the nearly 150 world leaders gathering in Paris at the 2015 U.N. Climate Change Conference, including President Barack Obama, or most of the world’s climate scientists who are sounding the alarm about climate change. Two months ago six of the biggest U.S. banks called for governments to adopt policies that will help accelerate investment and innovation in low-carbon energy sources, and this week one of those banks, Bank of America Merrill Lynch, published a 332-page report calling for solutions.

“We view climate change as one of the defining issues of our time,” costing ”unprecedented damage to financial stability,” states the report, noting that 2015 is the hottest year on record and 14 out of 15 of the earth’s warmest years have occurred since 2000.

Among the global costs it lists are:

  • $4 trillion in weather-related losses and 2.5 million lives lost over the past 30 years 
  • Nearly $200 billion in annual economic losses due to natural disasters over the past 10 years, up from $50 billion in the 1980s
  • 1.6% loss in annual GDP, equivalent to $1.2 trillion
  • 5 million deaths per year – 400,000 due to hunger and disease and 4.5 million due to air pollution, cancer and hazardous jobs.

The outlook grows even dimmer if no action is taken to change global policies to address climate change, according to the report, “A Call to Action – Climate Change Solutions Primer.”

Global GDP growth will be reduced by 1% to 5% a year; millions more will die from weather-related storms, pollution and disease; and investment portfolios will lose as much as 45% of their value as early as 2020. Emerging economies would suffer the most but developed economies would also be hurt.

“Doing nothing could be catastrophic,” the report says. “Those who argue that reducing emissions will be too expensive ignore the long-term costs of climate change — economic studies have consistently shown that mitigation is several times less costly than trying to adapt to climate change.”

The actual losses in lives and economic growth will depend, of course, on how much temperatures actually rise. The key number that scientists and policymakers are focusing on is 2 degrees Celsius — whether global temperatures rise an average 2 degrees Celsius above the temperatures that prevailed in the late 1800s when the burning of fossil fuels became widespread.

“There is a broad consensus that global surface temperatures will rise by 1.5 to 4.5 degrees Celsius by 2100E,” the report notes. A 2-degree rise would increase sea levels by 1.3 feet, decrease water availability by 20% and increase heat waves, while a 4-degree increase would raise the sea level by 2.3 feet, “inundate many coasts,” decrease water availability by 50% and increase the strength of the strongest North American cyclones by 80%, according to the report.

Currently global temperatures are about 0.8 degrees Celsius above the temperatures of the late 1800s, according to the UN Intergovernmental Panel on Climate Change, the World Bank and scientific journals. Without further action, the 2-degree Celsius threshold will be reached by mid-century and 4 degrees by 2100, the Merrill report says, citing current consensus.

So far 171 countries accounting for 97% of global carbon emissions have submitted plans to reduce those emissions, filing what’s known as their Intended Nationally Determined Contribution or INDC. But many studies, according to “A Call to Action,” say those plans are not tough enough to limit the temperature rise to 2 degrees Celsius. The Paris summit is the “Last Chance Saloon” to achieve that goal, according to the report. Despite these expectations, there is hope, and progress is being made to combat climate change. The paper cites many such examples, including these:

  • Global carbon emissions stalled for the first time in 40 years, and that change was not associated with an economic crisis. That same year, 2014, the global economy expanded 3%.
  • Emissions in China, the world’s biggest polluter, fell in 2014, the first decline in 15 years, while China led the growth in renewable energy use.
  • Global investment in energy efficiency and renewable fuels are rising. Investments in clean tech have more than tripled in 10 years to around $350 billion a year and another $300 billion is invested in energy efficiency.
  • Millennials, the largest demographic group in the U.S., favor clean energy technologies and the need to invest now in non-fossil-fuel-related energy
  • More corporations are making those investments, including tech giants like Apple (AAPL) and Facebook (FB) as well as corporations like General Electric (GE), PepsiCo (PEP), Johnson and Johnson (JNJ) and Walmart (WMT).

These changes are creating investment opportunities for investors while fossil fuel investments are coming under pressure from growing divestment initiatives as well as low oil prices. The Bank of America Merrill Lynch report notes that as of September, 436 institutions and 2,040 individuals across 43 countries representing $2.6 trillion in assets are now committed to divesting of fossil fuel assets.

Bank of America itself along with Citigroup have announced commitments to reduce credit funding for coal extraction projects, and Credit Agricole has said it is ending such funding. “Coal has become a stranded asset … while both oil and gas face growing risk over the next 10 to 25 years,” the report notes.

The “clean energy revolution” has reached a tipping point, increasing demand for renewable energy assets such as low-carbon ETFs from BlackRock’s iShares, CRBN, and State Street, LOWC, according to the report. It forecasts that $13.5 trillion will be invested in low-carbon energy assets over the next 15 years and lists more than 220 such stocks involved in energy efficiency, wind, solar, next-generation vehicles, batteries and storage, hydro, and clean technology, rating each for low, medium or high exposure to climate change-related solutions. About 32% of the picks are U.S. companies; the rest are European or Asian with a smattering from Brazil. Among the highest rated picks based in the U.S. are First Solar (FSLR), Tesla (TSLA) and Advanced Energy Industries (AEIS). 

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