Environmental shifts are completely changing the shape of how, where - and if – companies of all sizes will be able to stay in business. Failed crops, freshwater shortages, fires, flooding, political instability, lost supply chains, climate migration and emission caps – these and more are affecting or will affect, company valuations right across the globe.

The upheaval due to global heating will be infinitely more severe than the digital revolution that left companies such as Kodak, Blockbuster, Nokia, Myspace, Netscape, Toys R Us and Tower Records behind in the retail space. Nevertheless, these comparisons serve to remind us of what awaits companies who don’t cut their carbon footprint to help reverse global heating or innovate so they can cope with it. Doing both is wise.

Due to the short-term horizons used by the investment and finance industry, companies tend not to catch or act upon crises until it is too late. Most recent examples are the dot com and housing bubbles that wiped out trillions and caused recessions. Yet, after the fact, industry observers ponder on how it was so obvious these bubbles were coming.

This time, governments, regulators, leading investors and finance industry players are getting ahead of the biggest and most obvious bubble of them all – the carbon bubble.

In December 2019, the Bank of England announced that lenders and insurers in the UK are to be stress-tested against three different environmental scenarios. The BoE will scrutinise how they would cope with more frequent severe weather events such as floods, as well as what would happen if there were a sudden fire sale of high carbon assets. In the most severe scenario, lenders and insurers will test against temperature rises of as much as 4°C by 2080. The results of these stress tests may lead to fundamental changes in how they lend and run their businesses to ensure they remain resilient to global heating and in the event of a carbon bubble.

The BSI, the UK national standards body, will issue a new specification for investors so they can tell the difference between 'responsible' and 'sustainable' investment when choosing fund managers. The difference is important because while fund managers use 'responsible' investment to consider climate-related risk, time horizons are usually short and very few help companies to innovate or prepare for a carbon bubble. 'Sustainable' investment strategies are ‘intentional’ in that innovation and climate resilience is at the core. 

To avert a pensions crisis caused by a carbon bubble, the Department for Work and Pensions (DWP), the Financial Conduct Authority (FCA) and the Pensions Regulator have clarified that pension funds a have a legal obligation to consider climate-related risk. The Pensions Minister, Guy Opperman, is now working hard to ensure the pensions industry publicly show how they are preparing to ensure pensions savers are protected against a carbon bubble and other climate related-risk.

The EU is producing a classification system ('taxonomy'), or common language, on what can be considered an environmentally sustainable economic activity. This will be complemented by an EcoLabel for retail financial products with the best environmental performance.

One of many industry initiatives is the UN-backed Net-Zero Asset Owner Alliance, which includes members such as Aviva, Allianz, Axa and the Church of England Commissioners Group. They are publicly expressing a commitment to ensuring portfolios are net zero by 2050, encouraging laggards and showing investors where their money will be most resilient. Other notables include Climate Action 100+, The Transition Pathway, The Mallow Street Charter and The Investor Agenda.

These initiatives are just a tiny peek at what is going on today and what can be expected over the next ten years. To reverse global heating is going to be uncomfortable, to survive a carbon bubble and operate through irreversibly high temperatures is also going to be uncomfortable (to put it mildly). 

It’s time finance companies - including those involved in corporate financing - face that discomfort and innovate to become businesses of the future. Or fail.

Charlene Cranny is director of communications and campaigns for UKSIF

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