The IMF warns that the stock markets are not taking into account the risks of climate change

The stock markets have temporarily been detached from the macroeconomy. Despite the cascade of bad economic data, the main world stock markets have recovered in recent weeks much of the value lost in the blow of the first days of the pandemic. The flood of liquidity and the expectation of a tangible improvement in the health crisis – which we are already seeing – has been enough to ward off the worst omens and give wings to a partial comeback. But in the longer term, the asynchrony that worries the International Monetary Fund (IMF) is another: the current value of listed companies is not reflecting the risks of climate change. The pandemic will pass, but global warming will remain.

“The increased frequency and severity of disasters caused by climate change is a potential threat to financial stability,” the agency’s technicians said in a study published Friday. And in the Stock Exchanges, “a key segment” in the global financial architecture, those risks are barely leaving their mark: 2019 was the year of explosion of the environmental cause, which took root in broad layers of society and achieved a degree of commitment never seen before, but the parquets sailed practically oblivious to that movement. “Aggregate equity valuations do not appear to reflect physical risks in various climate change scenarios,” the Fund’s economists note in a chapter of its global financial stability report devoted entirely to this issue. You only have to see what happened in the American selectives, which went from record to record until the arrival of the coronavirus. “Better measurement and disclosure of exposure [de las empresas] to waste
Climate data are necessary for assessments to include the risks” arising from the environmental emergency, the IMF explains in its report.

The signs are overwhelming. The global average temperature has risen by 1.1 degrees from pre-industrial levels, in the heat – never better said – of the general increase in greenhouse gas emissions. But the worst is yet to come if there is no 180-degree turn in the path of the coming years: if the current path of mitigation continues, much slower than recommended by the scientific community, the mercury will rise up to three degrees by the end of this century, with increasingly extreme weather events “that can turn into disasters that cause loss of life and capital, as well as disruptions in economic activity.”

The sequence is not new: it was seen in Hurricane Katrina, which devastated the city of New Orleans (United States) in 2005. Or in Hurricane Maria in 2017, which caused damage in Dominica equivalent to twice its GDP. Without a change of course, the estimated annual losses in coastal cities would exceed one trillion dollars (the equivalent of the GDP of the Netherlands), compared to 60,000 million dollars (the GDP of Costa Rica) in a scenario in which investments were undertaken to adapt to the new environment and keeping constant – at current levels – the probabilities of maritime floods.

“Assessing future climate risks is extremely difficult, given the great uncertainties around climate science projections and the economic cost of predicted hazards,” imf officials acknowledge. But it is also necessary: those who invest in the stock market, the document admits, “do not seem to be paying all the attention it deserves to the increase in temperatures, which suggests that they are not paying all the necessary attention to climate change either.” This contradiction is especially evident in the case of companies with interests in emerging or developing markets, where the severity of the climate shock seems significantly greater.

Investment funds that are governed by sustainability criteria, that pay more attention to climate risks and have their sights set on much longer time horizons, are still a tiny fraction of the total. And individual investors “face a daunting informational challenge”: Based on climate scenarios mapped out by scientists, they should try to guess the impact on the stocks they hold in their portfolio or plan to invest in. In the tangle of complexity and scant information provided by companies themselves about their exposure to climate risks, IMF technicians are not surprised that current valuations do not reflect this new source of business uncertainty. But the result is clear: “Stock market valuations do not reflect this risk and, therefore, equity investors may be paying insufficient attention to climate variables.”

All in all, the gap between climate risk and stock markets is far from new. In the last half century, major disasters (hurricanes, but not only: also storms, floods, heat and cold waves or fires) have had a “modest impact” on stock indices and, in particular, on the securities of banks and insurance firms, the niche that – fundamentally – should hit hardest. And in not so many years, everything points to this bond becoming much closer, as the recurrence and strength of these types of natural and human tragedies increase and socioeconomic losses are “significantly higher than in recent history.” If the main objective of investors is to anticipate the future, at this point they are clearly marrando: myopia begins to be accused.

Source: The Country