Giant Investor Sees Profit From Fight Against Climate Change

Legal & General Group Plc, one of the world’s biggest investors that oversees $1.3 trillion, has modeled the climate crisis and sees both risk and a big opportunity.

Not only will climate action cost less than expected, but it will make emerging economies more robust. The funds manager anticipates that it can start shifting its investment portfolio now and make extra money during the next few decades — even if politicians keep failing to act on limiting an increase in global temperatures. If they finally do, profits will be even higher.

“The cost of transformation will be much more manageable than many people think,” said Nick Stansbury, head of commodities research at the company’s investment management unit.

Asset managers are increasingly trying to quantify the risks associated with climate change. While most still rely on external models of the future energy system to make decisions, Legal & General’s work is an indication that some are increasing their scrutiny of the issue. The investor formed a joint venture with management consultancy Baringa Partners to create a new global energy model. It provided people, data and some unspecified money for the project.

Their findings show a key benefit of tighter pollution rules will be declining demand for oil, that could reduce the economic risks that emerging nations led by China and India face, because “people are not vulnerable to an oil-price shock anymore,” Stansbury said in an interview.

So nations will be more self sufficient, trade flows will be rewritten and the world won’t need to spend so much money defending the Middle East, he said.

“In our analysis, we don’t see as many gas molecules coming out of the Middle East as some other people do,” Stansbury said.

A key surprise is that costs are lower than expected when netted against the cost savings from energy efficiency and lower fossil-fuel expenses and investments. In 2050, extra costs may be about $291 billion a year, less than half a percent of expected global economic output.

The asset manager is among the biggest 25 shareholders in almost all the largest oil companies and needs energy models that can incorporate changes more quickly, Stansbury said.

“I do not want LGIM or our clients to be caught out by underestimating how fast demand for renewables can grow, like many other agencies have,” he said.

Legal & General has also published editorials and pushed companies behind the scenes to disclose more information about how resilient their long-term strategies are against emission cuts implied by the 2015 Paris climate treaty.

Stansbury called on governments to consider policies such as carbon pricing to spur the shift toward greenhouse gas cuts. Emissions prices started on a regional level, “is the sort of direction from policy that would clearly be supportive” and cost effective, he told reporters at a briefing in London.