Political stagnation on climate risk means markets are doin’ it for themselves
Finadium 15/08/2024
"While there’s yet some distance for the regulatory treatment of climate investment to catch up with the mechanisms developing for securities lending, repo and collateral, there’s also increasing signals on what the market for environmental, social and governance (ESG) investing might imply for securities financing. We review some of the latest research and innovations for equities and fixed income and speak with experts on the big picture concerns and granular initiatives in the backdrop of transition financing. (...)
(...)Recent research from the EDHEC-Risk Climate Impact Institution shows how valuation techniques using probabilistic modelling can estimate the effect on global equity values from climate and economic uncertainties, financial contingencies, transition costs and physical risks.
Among its findings, researchers found that “prompt and robust abatement action is needed to keep losses below 10%. Conversely, over 40% of global equity value is at risk if decarbonisation efforts do not accelerate, with losses exceeding 50% when climate tipping points are factored in.”
The analysis took a top-down approach looking at equity as an asset class, without sector or geography segmentation, and weighed how future cash flows might evolve with discounting.
“Discounted cash flow models (often) have a single discount factor at a certain point in time, irrespective of whether at that point in time the economy is booming or the economy is in the doldrums, and different interest rates apply to these situations,” said Riccardo Rebonato, scientific director of EDHEC-Risk Climate Impact Institute and a researcher for the report. (...)"
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Political stagnation on climate risk means markets are doin’ it for themselves
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.
