Assessing the Impact of Climate Risk on Global Equity Valuations
Traditional discounted cash flow models often disregard state dependence by applying the same discount rate/factor to all cashflows occurring at a given date. But can this approach effectively value climate-sensitive securities?
New research by EDHEC-Risk Climate Impact Institute, with support from Scientific Beta, shows that this is not the case, and that the standard valuation tools are not fit for purpose. Using an upgraded integrated climate-economics model, we capture uncertainties in the climate system, physical damages, and discount rates under various emissions abatement policies, and assess the resulting impact on global equity valuations.
Sensitivity analyses reveal that the severity of the impact on equity markets depends on the pace of abatement, on the precise location of tipping points, and on the continued ability by Central Banks to counter periods of economic distress by lowering rates. The study finds that even in the absence of tipping points, failure to take abatement action can reduce global equity valuation by over 40%.
Professor Riccardo Rebonato, Scientific Director of EDHEC-Risk Climate Impact Institute, provides insights from the new paper titled "The Impact of Physical Climate Risk on Global Equity Valuations," and discusses investor implications with the audience.
This webinar addresses the following issues:
- What are the limitations of current climate-aware valuation tools?
- How is the impact of physical risk on equity valuation being underestimated?
- How to make discounting state-dependent and why it matters
- What are the key factors affecting the impact of climate change on global equity valuation?
- What are the implications of the current emissions abatement course for equity valuation?
- Can we rely on a 'Greenspan put' for climate risk?
- What are the implications for investment managers?
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.
