: Stock prices undercount climate-change risks, and real-estate markets are way way off, paper shows

Respondents are at least 20 times more likely to believe that climate risk is currently being underestimated by asset markets
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as opposed to overestimated, Stroebel and Wurgler said in a peer-reviewed paper discussing those findings and posted through the National Bureau of Economic Research. Asset markets included stocks and bonds, but also real estate and insurance.

Respondents who thought stock prices reflect climate risks “not enough”
outnumber those who believe that stock prices reflect climate risks “too much” by a factor of 20:1. Asked the same question about real restate and the “not enough” priced in camp hits at a factor of 67:1.

The report hits on the same day as a crucial update from the U.N.’s Intergovernmental Panel on Climate Change (IPCC), which said the last decade was hotter than any period in 125,000 years and offered the freshest look from this body yet on why severe droughts, fires and floods are happening more often. It also reminded policy-makers that there’s still time for a fix.

The climate-related investment survey and the U.N. update emerge as major stock indices
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hit record highs last week after the monthly U.S. jobs report came in better than expected. Markets were buoyed by upbeat sentiment for an employment recovery despite the COVID-19 delta variant.

Current market performance aside, in the next five years, respondents told Stroebel and Wurgler, risk concerns center on what are expected to be more demanding and more expensive regulatory rules for companies and their stocks. Companies could be forced to more uniformly report on emissions by the Securities and Exchange Commission and other regulators. So far, climate-change risk, at least in the U.S., has been largely voluntary but has already been heard on more earnings conference calls.

The SEC has closed its comment period on proposed changes, but has not yet ruled.

CEOs at the powerful Business Roundtable, investor groups and mostly Democratic lawmakers told the SEC in comments they’d support mandatory rules forcing publicly traded companies disclose detailed greenhouse gas emissions and other figures that reveal the climate-change impacts and risks to investors. Business leaders have stressed separating climate risk from traditional earnings reports, while Republicans have been worried that a one-size-fits-all approach to climate reporting won’t work for all companies.

Stroebel and Wurgler said the concerns for regulatory risk cut across respondents, even to those not as convinced as others that climate change overall was a huge risk.

“Even respondents who have low concern about climate change themselves are far more likely to believe that asset markets are underpricing the risks of climate change rather than that they are overpricing them, perhaps consistent with those respondents worrying about potentially underpriced transition risks due to regulatory interventions,” the researchers said. “Either the widespread belief that asset prices and insurance markets insufficiently price climate risk is way off, or these markets have a lot catching up to do.”

Looking beyond the five-year reporting risk, the picture changes.

In the next 30 years, a large representation of survey participants expect the impact to investments to be more direct “physical risk,” which might include increased insurance costs for companies, loss of property to storm or flood damage if climate-change impacts go unchecked and supply-chain disruption because of greater weather issues.

Pressure from institutional investors is viewed as the most powerful force for change among financial mechanisms, the survey showed. Major pension funds, including those in New York and California, with decades-long demands to make retirement payments, have upped the pressure on portfolio managers to include more climate-sensitive offerings and divest from oil
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The NYU researchers also said that carbon taxes and government subsidies are considered “potent” policies to change the investing landscape, according to the survey.

In perhaps the most complicated of the questions the finance professionals had to ponder, they were asked about economic conditions and climate change. Most respondents believe that realizations of climate risk are not correlated with
economic conditions, in part because they may believe that economic conditions are mostly local and climate change is a global issue.

Those who believe in a correlation were more likely to see climate change as associated with “good” rather than “bad” economic conditions, so for instance, a strong economy could produce greater emissions from a business. If those emissions were taxed, the company would pay more but would have the underlying health of the economy to help offset that tax bill.

“Scientists often describe climate change with superlatives. Urgent. Dire. Existential. The superlatives are all bad,” Stroebel and Wurgler said. “Encouragingly, financial economists are devoting more and more attention to the intersection of climate and finance.”

Yet a biting commentary earlier this year from Nobel laureate economist Joseph Stiglitz and Lord Nicholas Stern, chair of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics, spared few words for their fellow economists and the U.S. government when it comes to calculating climate-change risk.

Without a new approach to the social cost of carbon, the authors warned in a paper, the U.S. is significantly underestimating the financial impact of carbon emissions and impeding President Biden’s efforts to reach a net-zero-emissions economy by 2050.

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