Making the depot fit for climate change: This is something to consider

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NYU poll finds stock prices underrepresenting climate change risks
Climate change will affect 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 show that climate change should not be taken lightly. The Intergovernmental Panel on Climate Change (IPCC) also recently warned in a report that due to rising temperatures, more extreme weather events would have to be expected worldwide. According to the experts, the worst can only be prevented by immediately reducing CO2 emissions. However, climate change is likely to be unpleasant not only in relation to the weather, but also with regard to the stock market. According to experts, the associated risks are likely to affect all companies – and have so far been significantly underestimated.

IPCC report and NYU survey as investor wake-up call

Johannes Stroebel and Jeffrey Wurgler, two professors of finance at New York University’s Stern School of Business, asked more than 850 investment advisors, portfolio managers, political economists, regulators and academics from the financial sector to what extent they thought stock prices were changing to reflect the climate risks – and the answers were clear. MarketWatch reports that a clear majority of respondents who said they thought stock prices did not reflect the risks enough were 20 to 1. “Even respondents who are not particularly concerned about climate change were much more likely to say they believe investment markets are more likely to understate than overstate the risks of climate change,” the researchers said.

Investors should take these results as an opportunity to check their portfolio for possible climate risks and to arm themselves with their investments for climate change. 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 unpleasant surprises later. Investment bank Jefferies makes a number of points for investors to consider.

Physical risks from climate change affect many companies

According to “MarketWatch”, the team around Jefferies strategist Aniket Shah recommends that investors evaluate the physical risks for their investments as precisely as possible. Because of the expected increase in temperature, extreme weather conditions are becoming much more likely, as the Intergovernmental Panel on Climate Change warns. For companies, this means they could be more likely to lose property to storm or flood damage, or their supply chains could be disrupted by extreme weather events. Coupled with the proliferation of such events, companies’ insurance costs would also rise, while the insurance industry itself may face headwinds from higher claims, according to Jefferies. “Investors need to develop a more sophisticated supply chain analysis and risk framework around physical climate risks and their impact on business activities,” the experts recommend.

CO2 footprint is becoming a decisive factor for companies

In addition to the physical risks, which companies can hardly influence themselves, experts believe that the CO2 footprint will play an even more important role in the future – and will decide whether a company will be punished or rewarded on the market. According to the Intergovernmental Panel on Climate Change, an immediate reduction in carbon dioxide emissions is necessary to keep global warming below the two-degree threshold agreed in the Paris Climate Agreement. As a result, Jefferies experts believe that the companies that act fastest in this space will be rewarded in the market. In fact, 61 percent of all countries and 21 percent of companies have already set themselves the goal of reducing net carbon dioxide emissions to zero in the near future, the strategist team quotes “MarketWatch”. Among other things, Walmart wants to become climate neutral by 2030 and Apple has similar plans.

“Transparency creates awareness: Only when an investor deals with the CO2 footprint of his investments does he realize to what extent his investments are particularly climate-damaging or more climate-friendly,” said Thomas Wst, Managing Director of Valorvest asset management, to “Welt”. The greater the carbon footprint of a company, the greater the risk that investment margins will come under pressure in the medium term and assets will be destroyed in the long term, according to “Welt”.

But even if companies try to reduce their CO2 footprint, this is not always positive. Because if the carbon dioxide emissions are reduced primarily through other compensating factors, this entails new risks. Because technologies such as carbon dioxide sinks – artificial or natural deposits that store CO2 and thus remove it from the atmosphere – can endanger water quality, biodiversity and food supply because they require large areas. “For companies that rely heavily on offsets to achieve net-zero issuance, this is a potential risk that cannot be ignored,” Jefferies analysts said in a statement to MarketWatch. Ambitious corporate goals with a view to carbon dioxide emissions are therefore not enough. Instead, investors should carefully examine the means by which the companies in their portfolio intend to reduce emissions.

Paradigm shift with dire consequences for the global economy

As “MarketWatch” further reports, the Intergovernmental Panel on Climate Change sees only one scenario in which temperatures develop as agreed in the Paris Agreement by the end of the century, thus avoiding the worst climate risks. However, this scenario has a big catch, because as the US news site writes, it includes as a central point a society that puts the focus on the common good and not on economic growth. “Most of the world 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 continue – and that too would have a huge impact on numerous investments. So there doesn’t seem to be a future without climate change-related risks for the stock market.

Editorial office finanzen.net

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