Action on climate needed for global equity values

July 24th, 2024

Climate risk has a significant impact on global equity valuations and aggressive policies are needed to reduce losses, according to research from EDHEC-risk climate impact institution.

The study, "How Does Climate Risk Affect Global Equity Valuations? A Novel Approach", found over 40% of global equity value is at risk unless decarbonisation efforts accelerate.

It also found losses could exceed 50% with near climate tipping points.

Based on projections in the research, it found that robust climate policies, consistent with the 2°C Paris-Agreement target, can limit downward equity revaluation to 5-to-10%.

While the uncertainty of climate and economic outcomes and the state dependence of discounting are key contributors to changes in equity valuation, the research found these are often neglected.

It also found the magnitude of losses in global equities was dependent on the aggressiveness of climate policies and the extent of central banks’ ability to lower rates in states of economic distress.

The research noted that as regulations based on the Taskforce for Climate-related Financial Disclosures (TCFD) are being introduced, more companies are producing forward-looking assessments of their exposure to the impacts of climate change.

While most academic analysis has focused on transition risk (the costs to business arising from complying with the regulatory measures to curb greenhouse-gas emissions) rather than physical risk (the direct damages arising from unabated climate change), while this research takes both into account, the institute said.

Frédéric Ducoulombier, director of EDHEC-Risk Climate Impact Institute, said: “By modelling the considerable uncertainty in the physical and economical dimensions of climate change and linking it to top-down equity valuation, this study debunks the notion that the value of financial assets may be immune to climate changes and provides additional support for bold climate action."

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