Inaction over climate change could slash global GDP by 3% annually by 2030, BofA says

The cost of inaction over climate change could lead to the loss of 3 per cent of gross domestic product every year by 2030, ballooning to $69 trillion by the end of this century, Bank of America said in a report.

“Around 5 per cent [approximately $2.3tn] of global equity stock market value could be wiped out permanently by climate policy re-pricing, with a potentially extreme hit to corporate earnings for certain sectors,” the bank said.

The warning comes ahead of a meeting of global policymakers at Cop26 in Glasgow, Scotland at the end of this month. Under the Paris Accord, countries around the world are being urged to become climate neutral to contain rising emissions. The international agreement calls for countries to cap the warming of the planet at 1.5°C above pre-industrial levels, while at the same time reaching net-zero emissions by 2050.

To meet these goals, around $5tn will have to be invested annually over the next 30 years, an amount that is more than the US tax base, BofA said in its report.

“That's $150tn in total or three times the Covid-19 stimulus bill this decade,” the bank noted.

Decarbonisation is also set to push up global inflation by up to 3 per cent annually, as central bank balance sheet funding rises by $500 billion a year.

The pricing of carbon also needs to grow in tandem to near $200 per tonne if investments of $5tn should flow from now to 2050, BofA added.

“The need for energy transition investment to rise to over $5tn per year will create opportunities. This is net positive for enablers like utilities, industrials, renewables, industrial gases and batteries deployed at scale, such as green hydrogen, green mining and carbon capture,” according to BofA.

Last week, the International Energy Agency said in its World Energy Outlook that investments in clean energy would need to triple over the next decade to reach net-zero goals by mid-century.

The IEA's call to increase spending on clean energy comes amid a worldwide shortage of energy supplies, including oil and gas.

Oil prices are trading above $80 per barrel for the first time in three years, prompting organisations such as Opec to cite a rally fuelled by “energy transition” as a key reason.

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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”