Aggressive climate policies needed to preserve global equity values: EDHEC-Risk Climate Institution
Institutional Asset Manager 24/07/2024
"Global equities will lose 40 per cent of their value if the world does not accelerate its decarbonisation efforts, new research reveals.
A study from the EDHEC-Risk Climate Institution claims “aggressive climate policies are needed if global equity values are to be preserved”.
Frédéric Ducoulombier, Director of the Institute, says companies and investors have underestimated the impact of climate change on their businesses and portfolios, basing calculations on inconsistent and unreliable analysis.
“Typically, these [analytical] tools return a single estimate for the metric, based on the central realisation of the selected scenario. However, this approach does not do justice to the considerable uncertainty around climate change and its impact, even when considered more modestly from a broader perspective rather than asset by asset.”
Ducoulombier notes that some high-profile long-term investors have faced criticism for reporting analyses based on these tools, which suggested their portfolios would only be marginally impacted, “even in high-temperature scenarios that pose existential challenges to our societies”.
Professor Riccardo Rebonato, Scientific Director of EDHEC-Risk Climate Impact Institute and leader of the research team, says: “We have concluded that current valuations are most consistent with two market beliefs: either that very strong and effective abatement action will be undertaken, and climate change will therefore be brought under control; or that climate change, even if poorly abated, will have a negligible effect on economic output and consumption.”
He adds: “Since neither assumption should be considered a very likely scenario, we have argued that there is ample potential for equity revaluation.”
EDHEC has developed an alternative means of assessing climate risk on global equity valuations which Rebonato says upgrades mainstream integrated assessment models to incorporate the progress of climate science and make them fit for financial applications.
“By modelling the considerable uncertainty in the physical and economical dimensions of climate change and linking it to top-down equity valuation, the study debunks the notion that the value of financial assets may be immune to climate changes and provides additional support for bold climate action.”
The study reveals that if companies and policies successfully align with the Paris Agreement on climate change and limit global warming to 2 degrees Celsius global equity losses are predicted to be between 5 and 10 per cent.
However, the institute warns that over 40 per cent of global equity value is at risk unless decarbonisation efforts accelerate, and losses could exceed 50 per cent with near climate tipping points.
Rebonato says: “The magnitude of losses depends on the aggressiveness of emission abatement policy; the presence or otherwise of tipping points; on the extent of central banks’ willingness and ability to lower rates in states of economic distress.”
He concludes: “Prompt and robust abatement action is needed to keep losses below 10 per cent.”
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Aggressive climate policies needed to preserve global equity values: EDHEC-Risk Climate Institution
About EDHEC
Operating from campuses in Lille, Nice, Paris, London and Singapore, EDHEC is one of the world’s top 15 business schools. Fully international and directly connected to the business world, EDHEC commands a strong reputation for research excellence and the ability to train entrepreneurs and managers capable of breaking new ground. EDHEC functions as a genuine laboratory of ideas and produces innovative solutions valued by businesses. The School’s teaching is inspired by its research work and a focus on “learning by doing”, all with the aim of equipping people with the skills to succeed in business.
