Vanguard Investment Company's research department put out a well-written 20-page white paper on "The Economics of Climate Change". They analyzed climate change's impact over three areas and further gradated the impact over three temperature scenarios. The paper is thought-provoking and makes a case for divestment from fossil fuels and attempting to mitigate the impact of climate change. This conclusion is curious given Vanguard's quitting the "Net Zero" movement in 2022, shortly after the white paper was published.
Vanguard first looks at climate change and the direct physical impact of higher temperatures. Vanguard quotes from the 2021 Carbon Brief in noting that higher temperatures will produce falling crop yields, reduced labor productivity, lower biodiversity, the greater spreading of disease, sea level rises, and an increased incidence of extreme weather events such as storms, forest fires, droughts, flooding, and heat waves.
These in and of themselves should be alarming from a financial risk point of view. One need merely look at insurance companies refusing to write home insurance policies in certain disaster-prone states to see the financial implications. Climate-change forced migration is another possible outcome. This outcome has financial implications.
Vanguard also considers the impact of stricter environmental policies needed to achieve net-zero emissions. Its conclusion is that stricter regulations will be needed to keep the rise in global temperatures below 2 degrees Celsius and looser regulations if temperatures are permitted to rise 3 degrees or more. The economic drag on GDP of stricter policies is noted. Worth pondering - while looser policies will have less economic GDP drag in the short-term, might the resulting climate change impacts require even stricter policies which could lead to deeper GDP drag in the long-term?
Finally, Vanguard considers whether more green investing (ie, renewable infrastructure projects) might offset some of the GDP drag. In a mild climate change temperature rise situation, Vanguard feels that there will be less green investing motivation. An extreme rise in temperatures will require innovation as well as repairing the damage caused by higher temperatures. This seems to be a case of "If the house is on fire, that gets all of our attention but if it is not, there are other more urgent matters". From what I have seen anecdotally, there is a fair amount of spending on green infrastructure (ie, the 2022 Inflation Reduction Act) even with the total temperature rise not being definitively known.
What seems to be missing from Vanguard's analysis is a conclusion on what will happen if we do nothing. If we simply let climate change play out unchecked, what will be the impact on the three arenas? What other results might we see and what are the financial implications of those? The question could then be posed as to whether it is better to do something now or take a "wait and see" approach. By pulling out of its net-zero commitments, Vanguard has made it abundantly clear what its investment approach is and will be.