Underestimating Trump on Tariffs

Political

Economic

Summary:

The damage to the US economy would also be incalculable, except in a later damage assessment. By then it would be too late.

Economists most often try to work with data (facts). For example, some have used data to estimate that certain tariffs proposed by former president Donald Trump would cost a typical US household more than $2,600 a year. Others have marshalled data to estimate that US economic growth would be slowed by Trump’s plans for tariffs and mass deportations of unauthorized immigrant workers and by his idea of allowing the president to have more influence over the Federal Reserve Board.

But there is no data to help evaluate some of Trump’s bigger but more vague tariff plans. Trump outlined his latest ideas in a recent appearance at the Economic Club of Chicago. He said that if he wins reelection, tariffs would be a major source of government revenue and would be used to:

Retaliate against countries that are unfair traders.Rebalance trade with Europe and Japan, among others.Penalize American companies investing overseas if athey plan to sell in the US market.Prevent would-be aggressor states from making war on their neighbors.Rebuild the American industrial base.Repair the US tax base.Cut the federal deficit.

Now here is where the estimating gets tough. The effects of Trump's tariffs on the economy, on businesses, and on individual consumers and workers would literally be incalculable. Trump has told us of his tariffs’ many potential uses, but he left out details about how high they would be and how and when they would be applied. He has said that any tariff can be set at hundreds or a thousand percent. He clearly understands that if a tariff is high enough trade will cease, but that is a sacrifice that he sees as necessary to achieve his desired result. There is no upper limit. The assumption on which economists prepared their estimates was a 20 percent tariff on all imported goods, except goods from China that would bear a 60 percent tariff. But much more is being threatened by Trump than a blanket tariff at those levels.

There are those among Trump supporters, according to press reports, who say that the tariffs are mainly a negotiating ploy. But that is not what the former president is saying. If we are to take Trump at his word, there is no telling what tariffs there will be. A state of uncertainly may be good as a negotiating ploy in the private sector when buying or selling property, and sometimes maybe useful in extracting concessions from other governments in international negotiations, but widespread uncertainty in an economy would clearly be damaging to investment.

Nor are there clear answers as to what Trump would do with tariffs in a second term by looking to the extent of the legal authorities that Congress has given presidents.

The Constitution clearly gives the power over foreign commerce to the Congress, not the president. But the Congress has over time delegated much authority over tariffs to the president.

The president can retaliate against unreasonable and unjust (illegitimate) foreign practices. The courts could go along with additional retaliation but not tariffs on everything from everywhere. The issue is being litigated now.

If there were an international economic emergency, the courts could readily defer to the president to define when an emergency exists. There were 79 presidential declarations of national emergency through last year. It is not clear what the national emergency would be, but the president could find a reason for declaring one to exist, and the courts are deferential when it comes to the exercise of the president’s foreign affairs power.

There is the balance of payments authority for a broad tariff, but this is only good for 150 days before the Congress would have to act on granting further authority.

The president can act against countries that discriminate against US trade. The European Union, for example, treats a very large number of countries better than it does the United States, even if that discrimination is legitimate under the rules of the World Trading Organization (WTO), as the better treatment that these countries receive is through free trade agreements. Although the anti-discrimination authority granted to the US president has been on the books since 1930, it has never been used. But it could be, not for allowing Trump's proposed tariffs on all imports but more selectively.

Trump has threatened to impose a 200 percent tariff on a single American company, John Deere, if the agricultural equipment maker moves some production to Mexico and tries to ship goods made there into the United States (which would be duty-free under the Trump-negotiated free trade agreement, the United States–Mexico–Canada Agreement). Trade experts know of no previous case in which a US president has imposed a tariff on the shipments from a single American company. There is no authority whatsoever vested in the president to apply tariffs in this manner. But the threat creates uncertainty for investment.

This recitation of delegated authorities does not take into account the possibility that Trump’s Republican Party gains a majority in both chambers of Congress, which would likely rubber stamp his actions. When and where and to what extent Trump’s tariffs would hit is anyone’s guess, and foreign retaliation is also not easily calculable. It is also hard to estimate the effects of trade wars on the global economy. This is a very high risk experiment with no known limits.

The bottom line: The effect of the tariffs imposed in a second Trump presidency is incalculable.

The damage to the US economy would also be incalculable, except in a later damage assessment. By then it would be too late.

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Cohen

Economic

Singapore investment company Temasek is steering its strategy towards companies with clear decarbonisation plans and sustainable business models, with a goal to secure long-term profits.

Temasek’s managing director for sustainability Park Kyung-ah said in an exclusive interview with The Straits Times: “The success of our portfolio companies is effectively our success... them being resilient and them creating sustainable value ultimately comes back to our returns.

“Our remit is so every generation prospers, so when we do well, that helps Singapore’s future generations as well.”

While Temasek does not directly interfere with company decisions on a daily basis, it exercises voting rights as a shareholder, and uses those rights to nudge companies in more sustainable directions.

It also engages company boards and sets expectations for companies it has invested in, said Ms Park.

That strategy is vital for Temasek to realise its sustainability goals, as five major companies currently contribute around 80 per cent of the total emissions from its portfolio.

They are Singapore Airlines, energy group Sembcorp Industries, commodities manager Olam Group, port operator PSA International, and ST Telemedia.

Ms Park brought up the example of Sembcorp, which demerged from its rig-building unit Sembcorp Marine in 2020.

The rig builder then merged with its rival Keppel Offshore and Marine, eventually forming offshore and marine engineering company Seatrium.

Ms Park said Temasek had voted for Sembcorp to divest its holdings in Sembcorp Marine because doing so aligned with its values.

The move resulted in Sembcorp recording a net loss of $997 million for the year ended Dec 31, 2020, but Ms Park said that Temasek is also prepared to wait for returns to materialise, as companies take time to realise gains from pivoting towards more sustainable business models.

She said of Sembcorp: “It took a few years, it was not overnight when the value creation happened. But we are ‘patient capital’ and we had conviction that this will generate value for the longer term.”

In 2021, Sembcorp returned to black and posted a net profit of $279 million.

Its share price has more than doubled from $2.32 in January 2020 to $5.51 in October 2024.

Ms Park noted that in some sectors like energy, it is easier to see the path ahead and know where profitability will be.

Coal and fossil-based fuel production, for example, will likely shut down.

“That is going to be, eventually, a shrinking business, and in many cases, if you don’t move out of it, a stranded asset.”

In contrast, renewable energy businesses are more promising and fast-growing investments.

“Whether it’s hydrogen or other things, and grid storage in and around that, you can create a lot more value and have real economy impact as well.”

Temasek is prepared to accept fluctuating returns in the short term, as long as it is satisfied that a company in its portfolio is headed in the right direction and able to execute its long-term targets. The company should also have a healthy balance sheet that gives it the ability to meet those targets, Ms Park said.

“We invest with the future generation in mind, and with that, we have got to make sure we see where things are headed and that our portfolio companies are future-proof.”

Climate change affects how Temasek makes new investments, as any company that it invests in adds to the overall carbon emissions of Temasek’s portfolio and affects its sustainability targets.

Ms Park said around 90 per cent of the economy comprises firms that do not yet have green sources of revenue.

“We have got to figure out how to do more around that 90 per cent... We’re an ecosystem in the real economy, and that’s why it’s super important for us to engage our portfolio companies and help them on the transition pathway,” she said.

“As patient long-term capital, we are willing to take more investments... to create a greater impact from a climate perspective.”

To this end, Temasek has specific checklists and assessments for a company’s carbon emissions and how it performs relative to its peers.

But Ms Park said Temasek will not shun companies just because they have a higher carbon intensity. She noted that Temasek will look at whether the firm has a clear decarbonisation plan.

Still, Temasek has an internal carbon price, which means that if a company has higher emissions, it also has to deliver higher returns.

Hence, if a company is not moving fast enough on its sustainability journey and the risks of investing in it remain high, Temasek might also choose to divest its holdings, although it is not the preferred route to take.

“We will take strategic decisions because we are a commercial investor,” she said, revealing that Temasek has previously dropped companies for reasons that are not limited to their greenhouse gas emissions.

“We take a look at the holistic risk-return profile and whether it makes sense to divest or not,” she added.

By 2030, Temasek expects to cut its emissions to 11 million tCO2e. This refers to tonnes of carbon dioxide equivalent, a standard unit of measurement used in greenhouse gas emissions accounting. It aims to reach net-zero emissions by 2050.

“If we can get as close to that goal as we can, then not only have we made sure that our companies have decarbonised and are resilient, we enable Singapore to decarbonise faster as well,” she said.

“Our core mission is very much aligned to the future generation in Singapore. So if we can have an impact from a carbon and climate perspective, we can create sustainable value that benefits Singapore more broadly.”

Source: Straitstimes

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JanusHenderson

Economic

Energy

ESG stands for environmental, social, and governance. These three buckets represent non-traditional but financially material considerations companies should take into account when evaluating their business practices and investment decisions. At a glance, these risks and opportunities include:

Environmental considerations relate to the natural world. Examples include carbon emissions, waste and pollution, climate change mitigation or adaptation, deforestation and biodiversity loss.

Social considerations relate to how a company treats its key stakeholders, particularly its employees. Examples include human capital management, diversity, equity and inclusion (DEI) opportunities, health and productivity of workspaces, and rules around product mis-selling to customers.

Governance considerations relate to a firm’s corporate behaviour, governance, and decisions and accountability. Examples include executive remuneration, tax practices and strategy, and board independence and structure.

There is a growing recognition of the financial impact ESG-related risks and opportunities can have on company cash flows, valuations, cost of capital, and ultimately investment returns. An ‘integrated’ approach to ESG is the consideration of E, S, and G factors that may directly influence the long-term financial success of a company.

Are ESG factors ‘financially material’?

The term ‘financial materiality’ is used to describe the financial implications of specific environmental, social, or governance factors. An ESG issue is financially material if it affects (or could affect) the future value of a company or its ability to repay lenders. Which ESG issues are financially material can vary significantly between companies and industries. For example, a material ESG metric that may influence the future value of an industrial company is how it deals with toxic waste. If the company does not dispose waste in an environmentally sustainable manner, it may be exposed to litigation, fines, loss of reputation, or loss of customers. However, this issue will be largely immaterial for a software company where social issues, such as how it manages cybersecurity concerns, might be more critical to its future success.

At the heart of ESG integration is the simple idea that evaluating and understanding a company from both traditional financial analysis and ESG financial materiality analysis allows for a more complete perspective of a company’s future performance than either alone.

While the focus is often on the management of risks associated with ESG factors, these same factors often create opportunities. Companies that are improving on critical ESG measures or are exposed to ESG-driven growth trends could represent attractive investment opportunities. For instance, a company that is at the forefront of developing a lower-carbon version of its products

Importantly, ESG analysis—like traditional financial analysis—is not so much about what a company is doing today, but about the future. Our research focuses on how a company is managing ESG risks and opportunities and the impact on future cash flows or valuation.

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SAXO

Economic

Political

Two billionaire investment legends have weighed in over the last week on the current state of play for the markets and especially how they are bracing for the US election, as well as what they see as the unsustainable trajectory of US debt. Who wins the US presidential election and whether the winning president’s party has control of both houses of Congress will dramatically enhance the impact of this election. Their musings make clear that the stakes in this US election are very high for all investors, regardless of election outcomes. Below are a few key points from the two interviews that we should all consider as the market is clearly preparing itself here in late October for a Trump 2.0 outcome, which means both a Trump win and Republican control of both the Senate and the House of Representatives.

Stanley Druckenmiller

Stanley Druckenmiller, billionaire investor and former chairman of Duquesne Capital and former chief portfolio manager for George Soros’ Quantum fund, sat for an in-depth interview with Bloomberg. He was quite critical of both Trump and Harris for their fiscal policies and said he would vote for neither in the election, preferring to write in a candidate. Some key points:

Election outcome and impact: he shares our view that a Democratic sweep would be extremely unlikely, but if it happened it would be quite negative for stocks because of new tax policy and the impact on investor sentiment and business confidence. A Harris win with a split Congress (Senate is almost sure to be under Republican control post-election) is more or less similar to status quo, so very difficult to predict outcomes. The market Is leaning heavily for a Republican sweep and he believes this would boost the economy for quarter or two and improve business sentiment on moves to deregulate. Important to note, he thought that it would also spike US bond yields, which could suffocate the equity market. He considers it unlikely to see Trump winning but the Republicans not getting control of the House.

Views on the Fed: Druckenmiller criticized the Fed for excessively easy policy during the pandemic, when he felt they were too slow to begin hiking rates. He also criticized the Fed for possibly making a mistake again in starting to cut rates too aggressively, which could risk a new inflationary spike if the economy remains strong and in general risk Fed independence.

Investment strategies: as US stocks have rushed to new all-time high levels in September and October, it is interesting to note that Druckenmiller is less interested in discussing the equity markets and is more focused on the risks to the bond market, which could impact stocks negatively. He specifically indicating that he is taking a strong position against US long-term treasury bonds, hoping to profit from a sharp further rise in US yields. (It should be noted that since the Fed cut rates 0.50% for the first time in the cycle back in late September, the 10-year US treasury yield has risen sharply by more than 0.50%.

Paul Tudor Jones

Yesterday we got a relatively rare appearance from investing legend Paul Tudor Jones, head of Tudor Investment Corporation, who weighed in during a much shorter interview with CNBC with a somewhat different take and some very pointed observations. Some key points:

On the election odds: Tudor Jones generally refused to call the election, but did say it was critical for markets, representing a kind of “Macro Super Bowl” in its implication. Interestingly, he dismissed the current strong tilt in the betting market odds in favour of a Trump 2.0 outcome, saying that big money bets from wealthy Republicans are likely tilting the odds and that it is an easy market to manipulate. But he did say he had moved his portfolio in the direction of a Trump win.

On the very ugly US deficit and overall debt trajectory: some very strong language from Tudor Jones here – a must watch for how he reduced the US debt situation to basic maths here: US deficit/debt situation is like someone with an income of USD 100,000 borrowing USD 700,000 and promising to add USD 40,000 in additional debt per year, so why would anyone lend the US government any longer?

Money quotes: The Paul Tudor Jones interview is littered with pearls of wisdom and a great metaphor:

“We may have that point of recognition where all of a sudden the markets have different ideas than what the candidates have been espousing.” He later clarifies that this means he believes that neither candidate’s promised tax cuts and spending proposals have a realistic chance of seeing the light of day, because the US treasury markets can’t absorb even larger US deficits. “The chances have zero chance of being enacted.”

“Financial crises percolate for years, but they blow up in weeks.” [His concern is that the maths noted above on the dynamics of US deficits and debt can suddenly become a Eureka moment after a “seminal event” like the US election.]

He finishes with a fantastic metaphor, comparing the current government debt situation with the phenomenon of “kayfabe” in professional wrestling, where the audience knows the wrestlers’ performance is an act, even if portrayed as reality. The governments, he says, whether it is the US, UK, France, Italy or Japan are the professional wrestlers here. And therefore we, the markets and society at large, are all running around pretending that they are going to make good on their debts when we all know that they can’t. Post-election, Tudor Jones says, we risk a “Minsky moment” or point of recognition that the show is fake and what then are the implications.

How he is positioning: he dodged the question to a large degree here, but did say that [positioning for a Trump win] means “more inflation trades”. And he made clear at the tail end of interview, seemingly without reference to which candidate wins, that he will “clearly not own any fixed income [bonds]” and that he is outright selling long US treasury bonds (those of perhaps 10 years or greater maturities, most likely) because they are “completely the wrong prices”. This is the same trade that Stanley Druckenmiller touted in his interview.

What to do?

It’s important to both take the observations of legendary investors seriously. They are usually out in the media not in self-interest, but either to tout their charitable causes (Tudor Jones in particular) or to serve as a kind of moral authority for the investing world at large and even officialdom, if they care to listen. The other point is that they can be extremely quick to change their mind if something dramatically new happens. On the latter, their analysis is likely impeccable, but new Fed policy could mean that their actual trades prove unprofitable.

Overall, the critical takeaway from the two interviews is that both legends are focused chiefly on the US bond market due to the unsustainable trajectory of large US deficits. It may be difficult for the average investor to consider the impact of bond yields when most focus is on stocks, particularly after such strong period for the global stock markets last year and this year. But these interviews should make clear that any further rise in long bond yields is a strong headwind for stock markets. And given the endless flood of debt that the US government continues to issue, if bond yields drop, it would likely only be due to either Fed intervention (possibly quite good for US equities, but risking a strong new inflationary surge or because the US economy is headed for a more dramatic economic slowdown than most anticipate.)Important words from investing legends with about a century of investing experience between the two of them.

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Cohen

Economic

JPMorgan Chase & Co is in talks to start trading physical liquefied natural gas again after more than a decade on the sidelines, a move that lines up with chief executive officer Jamie Dimon’s calls for an increase in domestic production and energy exports.

The bank has held talks to secure a longterm LNG supply with at least three projects under development in the Gulf Coast, according to people familiar with the matter. The move is part of a wider push JPMorgan has made in recent years to get back into trading some of the physical commodities it abandoned in 2014.

Discussions are underway between the bank and developers looking to build a project to liquefy and export gas in Louisiana called Commonwealth LNG, Sempra Energy’s expansion of its Port Arthur site under construction in Texas and Energy Transfer LP’s planned Lake Charles LNG facility in Louisiana, the people said, asking not to be identified describing the confidential negotiations.

Spokespeople for JPMorgan, Sempra, and Kimmeridge Energy Management Co, which owns Commonwealth, declined to comment. A representative for Energy Transfer didn’t respond to multiple requests for comment.

Global demand is surging for LNG, with many nations seeking a cleaner-burning alternative to oil and coal as they shift toward renewable energy. The US has emerged as the world’s largest exporter thanks to an abundant supply of gas and the development of huge terminals on the Gulf Coast to liquefy and ship the fuel.

JPMorgan’s effort is the latest twist in what’s been a bumpy saga for top Wall Street firms’ involvement in the physical commodity space over the past two decades. JPMorgan inherited Bear Stearns’s energy-trading platform when it bought the failed bank during the financial crisis, and bulked up through additional acquisitions in 2009 and 2010.

By 2014, JPMorgan agreed to sell much of its physical commodities arm — though the New York-based company hung on to its metals desks — as banks grappled with heightened regulatory scrutiny in the business. But within a decade, the firm was back to trading in the physical natural gas space.

JPMorgan has expanded its physical natural gas trading operation in the US since 2022 and is eyeing US power, as well as gas and power in Europe, where it recently applied for a natural gas shipper license, some of the people said. Still, the firm has no plans to physically move LNG on water themselves, opting to stick to activities such as financing and hedging, two of the people said.Goldman’s Windfall

Russia’s invasion of Ukraine nearly three years ago sparked a massive shift in global energy trade and an ensuing market frenzy. At Goldman Sachs Group Inc, long a dominant force in commodities, that desk pulled in more than US$3 billion (RM13 billion) for 2022 — more than 10 times what it generated in 2017.

Companies in the US have accelerated construction of LNG facilities in recent years, and JPMorgan has long played a financing role for such projects. Furthermore, the build-out of artificial-intelligence infrastructure has sparked heightened client demand for commodities, JPMorgan’s global co-heads of sales and research, Claudia Jury and Scott Hamilton, said in an interview earlier this year.

In his annual letter to shareholders, Dimon wrote about the economic and geopolitical advantages that accompany domestic energy production. That followed earlier dispatches about the need for reliable, affordable energy in conjunction with investments for future efforts to reduce carbon dioxide and other greenhouse gases from the atmosphere.

“The export of LNG is a great economic boon for the United States,” Dimon wrote in April. “But most important is the realpolitik goal: Our allied nations that need secure and affordable energy resources, including critical nations like Japan, Korea and most of our European allies, would like to be able to depend on the United States for energy.”

In the same letter, he decried the Biden Administration’s pause on US LNG permitting, which effectively halted all new export projects from approval — calling the push to stop oil and gas output as “enormously naïve.”

Macquarie Group Ltd, one of North America’s largest energy traders, also has a preliminary agreement for US LNG supply with the project Texas LNG, under development by closely held Glenfarne Group. Macquarie chairman Glenn Stevens echoed Dimon’s remarks at the Australian bank’s annual meeting in July, telling investors that “we do think that natural gas, in particular, is an important part of the transition path for the world.”

Source: The edge markets

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CEPR

Economic

Higher projections of climate-induced losses

Researchers continuously seek to improve their understanding and modelling of the economic impact of climate change, exploring various methodologies and assumptions. Yet, applying different methodologies results in a wide range of output loss projections and impact channels captured. Table 1 illustrates the variety of methodological approaches and the disparity in the results when comparing damage functions proposed in the literature.

Economic Losses From Climate Change Are Probably Larger Than You Think: New NGFS Scenarios_1

Table 1 shows that the projected impact of an incremental 1°C temperature increase – in addition to the 1.2°C of global warming already observed today – ranges from 1% to 25% of global GDP. In the absence of further climate mitigation action (i.e. if only currently implemented policies are maintained), the global economy could lose as little as 2% or as much as 45% of total output due to climate change by the end of the century, depending on the damage function underlying the projection. These estimates represent global losses against a hypothetical baseline without further climate change (i.e. a scenario in which no further warming occurs).

Climate change may thus significantly affect our future wellbeing: the global economy could grow by almost 300% (Nordhaus and Boyer 2000) or by ‘only’ 125% (Bilal and Känzig 2024) after accounting for climate-induced losses (Figure 1). The high uncertainty around these losses underlines the need for further academic research on the economic impact of climate change.

Economic Losses From Climate Change Are Probably Larger Than You Think: New NGFS Scenarios_2

A new damage function in NGFS scenarios

Since their launch in 2020, NGFS scenarios have become a cornerstone of climate risk assessments for the financial sector. These are a set of hypothetical scenarios exploring a range of plausible outcomes, providing insight into future climate-related physical and transition risks. Damage functions play a vital role in NGFS scenarios by seeking to capture (chronic) physical risks posed by climate change. The NGFS closely monitors the latest developments within this field and adapts its modelling framework accordingly.

In the forthcoming release of NGFS scenarios (NGFS 2024a), a new damage function has been implemented. This has led to a significant shift in how physical risks are represented in the scenarios. 3 The new damage function authored by Kotz et al. (2024), which is based on the latest evidence from climate science, projects significantly higher losses compared to estimates in earlier vintages produced using the previous model authored by Kalkuhl and Wenz (2020).

The implementation of a new damage function ensures that NGFS scenarios remain state-of-the-art and reflect the latest findings in the literature on climate change:

First, the study by Kotz et al. (2024) is a recent extension to the literature, expanding on past studies (e.g. Kalkuhl and Wenz 2020, Kotz et al. 2021, Kotz et al. 2022). This damage function combines various elements to establish a better estimate of aggregate losses caused by climate change. Moreover, it uses more observations (i.e. additional years) and more granular historical climate and economic data (i.e. additional regions) on which the function is calibrated.

Second, the new damage function is more comprehensive. It covers additional climate impact drivers on top of mean temperature changes (which is the core variable used in most other studies). Temperature variability, annual precipitation, number of wet days, and extreme daily rainfall are also considered. It also incorporates more persistent effects of climate shocks, which means that it not only takes into account the instantaneous impact of a climate shock when it occurs, but also the delayed effects up to ten years after the initial impact. Its geographic coverage is another strength, with its ability to provide both global and country-level loss projections.

Third, the relatively high loss estimates produced by Kotz et al. (2024) offer a credible estimate of severe but plausible potential climate impacts and, as such, are well-suited for the risk assessment purposes of NGFS scenarios. The losses projected by this damage function are in the upper range of estimates in the literature (but not the highest). Hence, it is less likely to underestimate the potential negative consequences of climate change. NGFS scenarios are typically used in financial risk assessments, for which a precautionary approach is appropriate. Therefore, the use of damage functions that are in the lower range of estimates in the literature is likely to lead to a (potentially significant) underestimation of risks.

Caveats

The integration of a new damage function offers a valuable improvement in how physical risks are represented in NGFS scenarios. Nevertheless, some important caveats need to be kept in mind. First, climate damage functions are characterised by a high degree of uncertainty, which is demonstrated by the wide confidence interval of their loss estimates. Figure 2 displays the confidence interval of the Kotz et al. (2024) damage function based on the NGFS “Current Policies” warming trajectory. Thus, not only is the choice of damage function important, but so are the assumptions made within the damage function.

In previous vintages, NGFS scenarios employed a ‘high damage’ calibration of the damage function (95th percentile) instead of median projections (alongside high temperature increase percentiles for the most disorderly scenarios) (Figure 2). This assumption was justified as the Kalkuhl and Wenz damage function produced rather modest loss estimates compared to other estimates in the literature, reflecting its narrow calibration on changes in mean temperatures, as well as a lacking quantification of the persistence of the impact. Since Kotz et al. (2024) utilise a much more comprehensive set of climate impact drivers with associated persistence effects and produce loss projections whose magnitude is at the upper end of the literature, it is warranted to adjust previous modelling assumptions. Therefore, the most recent NGFS scenarios use median estimates for both damage and temperatures.

Economic Losses From Climate Change Are Probably Larger Than You Think: New NGFS Scenarios_3

Furthermore, while the Kotz et al. (2024) damage function extensively covers climate variations (e.g. temperature, precipitation), it may still not fully capture climate impacts. In particular, extreme weather events (i.e. acute physical risks) such as droughts and cyclones are expected to intensify as a result of climate change. Yet, it is unclear to what extent losses from acute events are reflected in the Kotz et al. damage estimates. Moreover, a number of other climate-related risks are not examined in this damage function, including climate-induced socioeconomic risks (e.g. migration, armed conflict) or climate tipping points. On the other hand, an underestimation of future adaptation could lead to an overestimation of losses. Overall, despite providing significantly more adverse loss projections, the Kotz et al. damage function is not the last word on all climate-related risks.

Conclusion

Damage functions are an essential tool to assess the potential economic impact of future climate change. Within the financial sector, they play a crucial role in climate scenario analysis and climate stress tests. They also help to demonstrate the losses avoided by carrying out a timely green transition. Consequently, damage functions have been integrated into the NGFS climate scenario modelling framework.

In the most recent NGFS scenarios, a new damage function by Kotz et al. (2024), has been implemented. This allows a much more comprehensive assessment of the potential damage caused by climate change, resulting in substantially higher projected losses from physical risks compared to previous assessments. This change highlights how our understanding of climate-induced economic and financial risks is deepening over time, typically showing higher impacts as research evolves. Nonetheless, further research is needed to reduce uncertainty around the impact of climate change and provide improved quantitative estimates for better policymaking and risk analysis.

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Cohen

Economic

Britain's commercial property market is returning to life after its post-pandemic freeze, albeit largely at much lower prices.

Some big-ticket office properties now on sale will show just where the market is likely to bottom out and how briskly UK deal volumes will recover - especially in the hard-hit office market. How that plays out could in turn signal what awaits other countries still gripped by a deeper downturn.

Real estate investor Nuveen has put a 21-storey City of London tower it completed in 2019, informally known as the "Can of Ham" due to its rounded shape, up for sale for 322 million pounds ($419 million), below about 400 million pounds it had sought in 2022, a person familiar with the matter said.

Canada's Brookfield is seeking around 500 million pounds for its nearby Citypoint tower, according to industry data provider CoStar. That compares with its most recent formal valuation of 670 million pounds, and its 560 million price tag when last sold in 2016, according to CoStar.

New office buildings are seeing robust demand, with investor M&G's new office towers at 40 Leadenhall in the City of London more than 80% let.

But a recent tour showed what it needed to do to attract tenants, with the building offering saunas, treatment rooms, a hair salon, a yoga room, Peloton fitness suite, a cinema room and a library - most for the exclusive use of office tenants.

"We had a conviction that tenants would want to upgrade their space," said Martin Towns, deputy global head of M&G Real Estate. Some out-of-favour older offices would have to be converted into other uses like housing, or demolished, he said.

The COVID-19 pandemic pummelled global commercial property markets by driving up inflation and financing costs, while causing a shift to hybrid and remote work that meant most tenants wanted less, but higher quality office space.

The cost of building prime offices in London has risen to more than 500 pounds per square foot now from less than 400 pounds before the pandemic, construction consultancy Turner & Townsend alinea said. Half of that increase was down to inflation, with the rest down to better amenities and green credentials, it said.

While some properties, such as older out-of-town offices, remain near-impossible to sell, the British market is improving for prime offices, rental housing and logistics, investors said.

A global retreat in inflation and interest rates is starting to ease financing costs and improve properties' appeal relative to other investments.

"The mood music has definitely changed in the UK," said James Seppala, head of real estate for Europe at Blackstone, the world's largest commercial property investor.

"There is more robust activity, and more participants are coming off the sidelines."

OFFICES LAG RECOVERY

Deal volumes across UK commercial property - which spans offices, retail, logistics and rental housing - have rebounded 26% annually in the second quarter, according to MSCI data, compared to 45% and 22% declines in France and Germany, respectively.

After plummeting in 2022 and 2023, UK commercial prices are also expected to rise 2% this year, even as they continue to fall in the euro zone and the United States, and to outperform other Western markets over the next four years, Capital Economics said.

But office sale volumes are still down 21% so far this year, MSCI said, lagging the rest of the UK market. There were also no deals over 100 million pounds in the first half of this year, the first such six-month period since 1999, according to CoStar.

Overall office vacancy rates also keep rising, hitting 10.1% in London in the third quarter - the highest for more than 20 years, CoStar said. It is nearly 17% in the city's eastern Docklands area, where Canary Wharf Group is considering converting some empty space into hotels.

FORCED SALES

Property investors and agents say would-be sellers are coming round to accepting today's lower prices. Some may be forced to sell by high refinancing costs, according to bankers, but foreign buyers could be willing to swoop.

"Many investors are saying the UK is a good investment location because of the stable political situation and they are wanting to get in before prices start to rise," said Fiona Voon, head of real estate capital markets UK at BNP Paribas.

Among domestic investors, Schroders plans to spend hundreds of millions of pounds on British commercial properties this year and next, likely including prime offices. The market was attracting increased interest from investors in the Middle East, Asia and Australia, the asset manager said. It said it would soon begin talking to potential tenants about pre-letting its own planned 63-storey City tower at 55 Bishopsgate.

"Offices to some extent has been a bit of a dirty word," said Nick Montgomery, global head of real estate at Schroders. "From the position we're in, it's more of an opportunity than a risk... The pendulum always tends to swing too far."