Climate-related global equity losses could “exceed 50%”, say academics
Funds Europe 18/07/2024
"Over 40% of global equity value is at risk unless decarbonisation efforts accelerate, according to academic research.
Losses could exceed 50% with “near climate tipping points”, according to research from the Edhec Risk Climate Impact Institute.
The institute, which is part of the Paris-based Edhec Business School, called for “prompt and robust abatement action” to keep losses below 10%.
The uncertainty of climate and economic outcomes and the “state dependence of discounting” are two key but neglected contributors to changes in equity valuation, the researchers said.
Aggressiveness of emission abatement policy is a key factor in the magnitude of losses. So too are the presence or not of tipping points and the extent of Central banks’ willingness and ability to lower rates in states of economic distress.
Edhec said its team had upgraded mainstream integrated assessment models to incorporate the progress of climate science and make them “fit for financial applications”.
The team modelled the “considerable uncertainty” in the physical and economical dimensions of climate change and linked it to top-down equity valuation.
Frederic Ducoulombier, a director at Edhec, said 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”.
Professor Ricardo Rebonato, who led the research team, said: “These results – obtained with mild assumptions – underline the importance of uncertainty and state-dependent discounting for climate-aware equity valuation. Our approach shows that it is possible and fruitful to integrate climate risks into financial analysis and we will be working further to develop theoretically solid and practically implementable tools for climate-aware investment management.”
“State-dependent discounting” – described as a “methodological innovation” – recognises that physical damages from climate change impair cashflows in a “state-dependent manner” and allow discount factors to be determined by economic conditions and damages, which highlights the neglected role of state-dependent discounting.
Edhec’s research is called ‘How does climate risk affect global equity valuations? A novel approach’.
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Climate-related global equity losses could “exceed 50%”, say academics
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.
