Climate change is one of the most pressing global issues of current time, and its impact is being felt across various sectors. One area that is often overlooked, however, is the impact of climate change on stock markets. In recent years, there has been an increasing recognition of the connection between climate change and stock market performance. The impacts of climate change are expected to be significant and far-reaching. Rising temperatures, extreme weather events, and changes in precipitation patterns are just a few of the consequences that will affect societies and economies worldwide. These changes will affect businesses in various ways, from disruptions in supply chains to increased costs of operation.
The Global Risks Report 2021 by the World Economic Forum recognized climate change as the top risk facing the world in terms of likelihood and impact over the next decade. In terms of both likelihood and effect, the report identified five risks as particularly noteworthy. These included severe weather situations and the lack of success of climate change mitigation and adaptation.
One of the most significant ways that climate change impacts stock markets is through the physical risks it poses to businesses. Physical risks include things like severe weather actions, such as hurricanes, floods, and wildfires. These actions can destruct property, disturb supply chains, and cause business interruptions, leading to lower earnings and lower stock prices.
Another way that climate change can impact stock markets is through regulatory risks. Carbon taxes and emission regulations are examples of the measures that governments around the globe are enacting to combat climate change. These measures can have significant impacts on companies in carbon-intensive industries, such as oil and gas, and lead to decreased profitability and lower stock prices. According to a report by Carbon disclosure Project (CDP), companies that fail to disclose their climate change risks and strategies face a potential loss of market value of up to 45%. This highlights the importance of transparency and accountability in addressing climate change risks. According to the Global Carbon Project, global carbon dioxide emissions are expected to increase by 2.5% in 2021, following a 6.4% decline in 2020 due to the Covid-19 pandemic. This underscores the urgent need for action on climate change.
Climate change can also create reputational risks for companies. As consumers become more aware of the impacts of climate change, they are increasingly demanding that companies take action to address it. Companies that are seen as not taking climate change seriously risk losing customers and damaging their brand, which can lead to lower stock prices. Investors are increasingly recognizing the importance of considering climate change risks when making investment decisions. Climate change-related risks are becoming more visible in financial statements, and companies that fail to address these risks may face higher borrowing costs and lower valuations. In 2020, the S&P Global Clean Energy Index outperformed the S&P 500 Index by more than 70%. This indicates that there may be opportunities for investors to benefit from the transition to a low-carbon economy.
Impact investing, in which capital is allocated with the intention of improving society or the ecosystem, is another area of rapid expansion, such as investing in renewable energy or companies with strong environmental and social practices. This trend is likely to continue as more investors recognize the importance of considering the impacts of climate change on their investments.
A report by the Asset Owners Disclosure Project found that over 80% of the world’s 500 largest asset managers have no strategy to address climate change risks in their portfolios. This suggests that many investors may be overlooking the potential impacts of climate change on their investments. These data points illustrate the scale of the challenge posed by climate change and the potential impact on stock markets and investors. They also highlight the need for urgent action to address climate change risks and transition to a more sustainable economy.
In conclusion, climate change is having a significant impact on stock markets, and this impact is likely to increase in the coming years. Companies that fail to address climate change risks may face significant financial losses, while those that take action to address these risks may be better positioned for long-term success. As investors, it is important to consider the impacts of climate change when making investment decisions and to seek out investments that align with our values and long-term goals.
Dr Neha Seth is Assistant Professor, School of Commerce and Management, Central University of Rajasthan.