Latin American investors lack awareness of climate risks

Region’s investors behind US, Europe & China in awareness of stranded assets but tide is turning

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stranded assets

Neither the idea of stranded assets nor the global campaign to divest from fossil fuels has taken root in Latin America (image: Joe Brusky)

Latin American countries lag behind counterparts in Western Europe and the US, Australia and China when it comes to understanding and managing the risks to investments of climate change and concepts such as ‘stranded assets’, according to a new report.

The notion of stranded assets – assets that have lost value because of such factors as environmental challenges, new government regulations or the falling costs of technology – features low on the region’s agenda, says the report by the Inter-American Development Bank (IDB). This is despite the “systemic threat” they pose to financial stability.

“This is a significant omission,” the report warns. Its authors argue that high quantities of the region’s investment is concentrated in fossil fuels, much of which will be “unburnable” if the world is to avoid catastrophic climate change.

There has been a tendency among financial institutions in Latin America to focus on short-term or immediate concerns

Instead of climate change, the region’s investors are primarily concerned with corporate governance and economic growth. However, the way environmental risks may be presented (or ‘framed’) as independent of these priorities could partly explain this. Therefore, referring explicitly to the concept of stranded assets could help raise awareness of the risks and influence investors’ decision-making.

Sovereign debt is also a big risk for economies sensitive to climate change. Many countries in Latin America are susceptible to the costs of storms or droughts, or are overexposed to fossil fuel industries, such as Venezuela.

Short-term outlook

“There has been a tendency among financial institutions in Latin America to focus on short-term or immediate concerns,” said Ana Rios, climate change specialist at the IDB. This has resulted in the risks and implications of climate change being overlooked, she added.

73%

of staff from financial institutions surveyed for the IDB report said they didn’t have, or know of, a colleague responsible for climate risks

However, investors such as pension funds are more receptive to assessing the risks of climate change and stranded assets on investments because they must necessarily factor long-term risks into their portfolios.

Rios said that despite the lack of action so far, the region is in the process of catching up with countries that have a more advanced understanding of climate risks. In 2015, Latin American investors reported the largest decrease in their holdings of a company’s shares due to the risk of stranded assets.

Guy Edwards, co-director of Brown University’s Climate and Development Lab, said the topics of stranded assets and climate risk are especially relevant for Latin America and the Caribbean as the region is highly vulnerable to extreme climatic events.

Edwards added that the debate on stranded assets has jumped up Latin America’s agenda due to various changes such as the steep drop in the costs of renewable energy and the entry into force of the Paris Agreement in 2016. Over 20 Latin American and Caribbean countries have now ratified the accord.

Globally, more knowledge is required in order to make assets more climate resilient and reduce the risk of ‘stranding’. The IDB surveyed staff from a number of financial institutions for their report, 73% of which said they did not have, or know of, anyone within their organisation responsible for ensuring that relevant climate risks are considered.

Divest campaign blind spot

Along with the idea of asset stranding, the global campaign to divest from fossil fuels – one of the fastest growing social movements in the world – has failed to take root in Latin America. The IDB report’s authors argue the divest campaign has managed to stigmatise institutional investors in fossil fuels, which has affected their brand value and ability to influence policy.

This is neither wholly a semantic issue nor the fault of Latin American investors. Many of the region’s pension funds – a financial sector often targeted by divest campaigners – are owned by international financial institutions. Often these have responsible lending policies but are yet to implement them in their Latin American portfolios.

More promising are the efforts of financial industry associations and central banks in Latin America: “The Brazilian central bank encourages all financial institutions to develop environmental, social, and governance risk management practices and processes,” the report says.