A database of climate change newspaper articles.
Why are investors not pricing in climate-change risk?
COMPANIES ARE often quick to tout their green credentials. So are many of the sophisticated institutional investors who buy and sell their shares. Yet when it comes to pricing the risk of climate change, those investors may be falling short. New research suggests that the risk of climatic disasters such as floods, storms and wildfires are not reflected in the price of equities around the world. What is more, when disasters do occur, the fall in share prices is modest. Researchers at the IMF studied the impact of 6,000 large climate-related disasters on stockmarkets in 68 developed and emerging countries since 1980. They found that financial losses related to such disasters have varied widely. Hurricane Katrina, in 2005, killed 2,000 people and affected half a million. It also had the largest absolute economic impact of any event in the researchers’ sample, costing 1% of American GDP. Yet the American stockmarket scarcely budged. Floods in Thailand in 2011, which killed 813 people and affected 9.5m, had the biggest relative economic effect, inundating South-East Asia’s biggest carmaking industry and costing 10% of Thai GDP. The Bangkok stockmarket collapsed by 30%. But overall, the researchers found that share prices were little affected by climate disasters. They lost just 1%, on average, in the days surrounding such disasters (see left-hand chart). The decline in fact starts before catastrophe strikes, because weather forecasters, and hence investors, can see storms coming. The IMF researchers also assessed the extent to which future climate risk may affect current valuations of share prices across countries. If investors are incorporating climate change into their decisions, then firms in countries more exposed to floods or fires should trade at a discount; those in less exposed places should trade at a premium. They found no link between climate vulnerability and aggregate equity valuations, as measured by price-to-earnings ratios (see right-hand chart). Further analysis, which controlled for potentially conflating factors such as differences in countries’ average income levels, came to the same conclusion. Why are investors not pricing in climate-change risk? One reason may be a lack of data. More companies are disclosing their climate risks, but they are still in the minority. Without this information, it is hard for investors to gauge the threat that companies may face. Another reason is a mismatch of time horizons. Equity investors buy a stake in companies’ physical assets, which seldom last longer than 20 years. The most devastating effects of climate change will not materialise for another 30 years or so. A third and more worrying explanation is that investors are simply ignoring climate change. Here the report offers a glimmer of hope. The evidence suggests that investors in long-term sovereign bonds demand a premium from countries with high climate risk. That 30-year horizon is shrinking. It may be only a matter of time before equity investors do the same. Support for green parties rises following unusually warm years The West wants to take advantage of its push to diversify Still, it remains one of America’s safest big cities Support for green parties rises following unusually warm years The West wants to take advantage of its push to diversify Still, it remains one of America’s safest big cities America introduces a third-gender option on its passports. It’s not the first country to do so Covid has never spread faster than in recent surges in Hong Kong and South Korea Published since September 1843 to take part in “a severe contest between intelligence, which presses forward, and an unworthy, timid ignorance obstructing our progress.” Copyright © The Economist Newspaper Limited 2022 . All rights reserved.