The negative consequences of climate change are becoming increasingly noticeable in Germany in the form of storms and floods. According to a survey, climate risks are currently being greatly underestimated on the investment markets. However, experts warn that the effects of climate change will soon be felt in the depots. What investors should pay attention to now.
• NYU survey: Stock prices do not sufficiently reflect climate change risks • Climate change will impact all companies and their businesses
• Investment bank Jefferies provides guidelines for assessing the risk of investor portfolios
The serious storms in parts of Germany in the summer of 2021, as well as the forest fires in Greece that lasted until the end of September 2023, showed that climate change should not be taken lightly. That is why the Intergovernmental Panel on Climate Change (IPCC) warned in a report that we must prepare for more extreme weather events worldwide due to rising temperatures. According to the experts, the worst can only be prevented by immediately reducing CO2 emissions. But climate change is likely to be unpleasant not only in terms of the weather, but also in terms of the stock market. According to experts, the associated risks are likely to affect all companies – and have so far been significantly underestimated by investors and analysts.
Intergovernmental Panel on Climate Change report and NYU survey as a wake-up call for investors
Johannes Stroebel and Jeffrey Wurgler, two finance professors at New York University’s Stern School of Business, conducted a study asking more than 850 investment advisors, portfolio managers, political economists, regulators and academics from the financial sector about their opinion of stock prices reflect the climate risks – and the answers were clear. As “MarketWatch” reports, respondents who said that they believe stock prices do not sufficiently reflect the risks were clearly in the majority by a factor of 20:1. “Even participants who themselves had little concern about climate change were much more likely to say they believe investment markets are understating rather than overstating the risks of climate change,” the researchers said, according to the US magazine.
Investors should take these results as an opportunity to examine their portfolios with a view to possible climate risks and to prepare themselves for climate change with their investments. This does not necessarily mean throwing all conventional investments out of the portfolio and only focusing on green investments. Instead, an individual risk analysis should be carried out with a view to climate change in order to protect yourself from later unpleasant surprises. The US investment bank Jefferies lists a few points that investors should consider.
Physical risks from climate change affect numerous companies
According to MarketWatch, the team led by Jefferies strategist Aniket Shah recommends that investors evaluate the physical risks for their investments as precisely as possible. Because of the expected rise in temperatures, extreme weather conditions will become significantly more likely, as the Intergovernmental Panel on Climate Change also warned. For businesses, this means they are more likely to lose assets due to storm or flood damage, or that their supply chains could be disrupted by extreme weather events. “Investors need to develop a more sophisticated supply chain analysis and risk framework around physical climate risks and their impact on business operations,” the experts recommend.
Combined with the increase in such events, companies’ insurance costs would also rise, while the insurance industry itself is likely to face headwinds from higher claims, according to Jefferies. In fact, the German reinsurance company Munich Re indicated at the annual reinsurers meeting in Monte Carlo, Monaco that both demand and costs for reinsurance are likely to increase significantly worldwide due to rising climate risks.
CO2 footprint is becoming a crucial factor for companies
In addition to the physical risks, which companies can hardly influence themselves, the CO2 footprint will also play an even more important role in the future, according to experts. This indicator will increasingly determine whether a company is punished or rewarded in the market. According to the Intergovernmental Panel on Climate Change, an immediate reduction in carbon dioxide emissions is necessary to ensure that global warming remains below the two degree threshold agreed in the Paris Climate Agreement. Jefferies experts therefore believe that those companies that act fastest in this area will be rewarded in the market. In fact, 61 percent of all countries and 21 percent of companies have already set the goal of reducing net emissions of carbon dioxide to zero in the near future, “MarketWatch” quotes the strategist team as saying. Among other things, Walmart wants to become climate neutral by 2030 and Apple is also pursuing similar plans. The warnings from Apple CEO Tim Cook fit in with this. He told the German Press Agency in an interview in October 2023: “There is probably no bigger crisis than climate change. You don’t just have to look at the droughts, the forest fires and the heat this summer.”
A growing number of German companies are also aiming to achieve complete climate neutrality. For example, the logistics group Hapag Lloyd aims to be climate-neutral by 2045. The energy company Uniper wants to achieve this goal by 2040.
“Transparency creates awareness: Only when an investor deals with the CO2 footprint of his investments does he become aware of the extent to which his investments are particularly harmful to the climate or more climate-friendly,” said Thomas Wüst, managing director of the asset management company Valorvest, to “Welt”. The larger a company’s CO2 footprint, the greater the risk that investment margins will come under pressure in the medium term and assets will be destroyed in the long term, “Welt” continues.
But even if companies try to reduce their carbon footprint, this is not always positive. If carbon dioxide emissions are reduced primarily through other compensating factors, this poses new risks. Technologies such as carbon dioxide sinks – artificial or natural reservoirs that store CO2 and thus remove it from the atmosphere – can endanger water quality, biodiversity and food supplies because they require large areas of land. “For companies that rely heavily on offsets to achieve net-zero emissions goals, this is a potential risk that cannot be ignored,” Jefferies analysts said, according to MarketWatch. Ambitious corporate goals with regard to carbon dioxide emissions are therefore not enough. Instead, investors should carefully examine the means by which the companies in their portfolio want to reduce emissions.
Paradigm shift with dire consequences for the global economy
As “MarketWatch” further reports, the Intergovernmental Panel on Climate Change only sees a scenario in which temperatures develop by the end of the century as agreed in the Paris Agreement, thus avoiding the worst climate risks. However, this scenario has a big catch because, as the US news site writes, the central point is a society that focuses on the common good and not economic growth. “Most of the global economy is based on consumption,” writes Aniket Shah’s team. “A paradigm shift away from economic growth could significantly impact consumer spending across all sectors and regions,” the Jefferies experts continued – and that would also have an enormous impact on numerous investments. Lower consumption levels would inevitably be reflected in lower corporate profits. In summary, it can be said that there does not seem to be a future without climate change-related risks for the stock market.
Editorial team finanzen.net
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