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Stock prices underestimate climate change risks

Updated: Feb 11, 2022



Your investments, even those in the safe hands of professionals, dangerously underestimate climate risks.


This opinion is shared by the “overwhelming majority” of 861 anonymously polled financiers, investment advisers, portfolio managers, regulators and economic advisers. The survey was conducted by Johannes Stroebel and Jeffrey Wurgler of the Stern School of Business at New York University.


Respondents are at least 20 times more likely to believe that climate risk is currently underestimated by asset markets, findings posted via the US National Bureau of Economic Research.


"Either the widespread perception that asset prices and insurance markets are not sufficiently exposed to price risk, or these markets have yet to catch up," said Johannes Stroebel and Jeffrey Wurgler.


The report is published on the same day as a major update of the UN Intergovernmental Panel on Climate Change. The study notes that the past de​​cade has been the hottest in 125,000 years and offers a fresh look at the causes of severe droughts, fires and floods.


Assessment of climate risks in the next 5 years.


Despite the current state of the market, respondents expect more demanding and costly regulations for companies and their shares. Companies may be required to report emissions uniformly to the Securities and Exchange Commission (SEC) and other regulators. Until now, such reporting in the US has been voluntary. Concern about regulatory risk was noted by all respondents, even those who did not consider climate change in general to be a huge risk.


Business leaders are stressing the need to separate the climate risk report from traditional income statements. Republicans are concerned that a one-size-fits-all approach to climate reporting won't work for all companies.


Leaders of the influential business roundtable, mostly Democratic lawmakers, have told the SEC they support mandatory rules for publicly listed companies. Companies must regularly publish:

  • detailed data on greenhouse gas emissions,

  • climate change impact data and

  • information on climate risks for investors.


"Even those respondents who are not concerned about climate change believe that asset markets are understating rather than overstating climate change risks. This is in line with those respondents who are concerned about potentially underestimated post-regulatory transition risks," they said.


Assessment of climate risks in the next 30 years.


Over the next 30 years, a significant proportion of study participants expect:

  • direct "physical risk" on investment from climate change;

  • increased insurance costs for companies;

  • loss of company property as a result of hurricanes;

  • flood damage;

  • disruption of the supply chain due to more severe weather problems.


Pressure from institutional investors is seen as the most powerful factor in changing financial arrangements. Large pension funds have stepped up pressure on portfolio managers to include more climate-sensitive assets in their portfolios and steer clear of oil.


The New York University researchers also noted that carbon taxes and government subsidies are seen as "workable" strategies for changing the investment landscape.


“Scientists often describe climate change in superlatives. Urgently. Terrible. Everything is bad. It is encouraging that financial economists are paying more and more attention to the relationship between climate and finance.”


Economic conditions and climate change are arguably the most complex issues financial professionals have had to think about. The majority of respondents believe that the implementation of climate risks is not related to economic conditions. They probably believe that economic conditions are mostly local and that climate change is a global problem.


Others believe climate change is linked to "good" rather than "bad" economic conditions. A strong economy can lead to more polluting emissions from businesses. If harmful emissions are taxed, companies will pay more, but the "health of the economy" will help offset these tax costs.


Earlier this year, Nobel Prize-winning economist Joseph Stiglitz and Lord Nicholas Stern, chairman of the Grantham Research Institute on Climate Change and the Environment, warned:


"... without a new approach to the social cost of carbon, the US is vastly underestimating the financial impact of carbon emissions and hindering President Biden's efforts to achieve a zero-emission economy by 2050."


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