A huge chunk of a country’s wealth is normally held in shares and bonds. This is one of the ways in which a segment of the populace cushions itself from the vagaries of economic upheavals.
However, financial experts are worried that climate change — that elephant in room that many ignored — may have far-reaching financial risks than ever thought.
According to the Wall Street Journal, businesses around the world are interested in stress tests to determine how different climate scenarios will affect such long-term savings and whether there is a need for additional capital defence mechanisms.
Their concern is that banks, insurance companies and pension funds may lose value due to policies designed to reduce carbon emissions mainly from fossil fuels.
“Institutions such as the Bank of England, the Financial Stability Board and the European Systemic Risk Board are examining how banks, insurers and pension funds would cope if policies designed to reduce carbon-dioxide emissions led to a sharp drop in the share price of oil, gas and coal companies,” said the journal.
These fears are legitimate considering that the recently-concluded international climate deal in Paris aims to contain average temperatures at 1.5 degrees, meaning that more fossil fuel deposits would have to remain underground, sending shock waves in stocks invested in oil and gas.
Kenya, for example, has an economy that relies heavily on oil. The recent drop in international prices of oil has been a boon to motorists on one hand while investors in the sector cried foul on the other hand.
The above concerns will no doubt have a bearing on the country that is currently investing heavily in the oil sector after the recently discovered oil reserves in the northern part of the country. In addition, there are huge coal deposits at the Mui Basin in Kitui.
A collapse in the value of fossil fuel-based assets will no doubt send the country back to the drawing board.