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Investors respond to potential climate impacts of extreme weather, but companies are underestimating their exposure to risk
Heatwaves can affect stock market prices, with some companies losing up to 2 per cent of their market value due to investor perceptions of climate risk, according to a University of Otago business academic.
David Lont, head of the university’s department of finance and accounting, is a co-author of a recent study on the impact of extremely hot days on stock market activity.
Researchers in NZ and California used National Oceanic and Atmospheric Administration data to measure market response to thousands of hot days that occurred between 2003 and 2017.
The results are published online in the journal Weather and Climate Extremes.
Lont said the findings suggests equity markets are recognising weather-related climate risks but are underestimating their financial impact.
“All things being equal, the risk to the industry from extreme weather events would be understood and priced accordingly but the drop in value after an event shows that is not the case,” he said in a university statement.
“The investors are the likes of pension funds and insurance companies, so it’s pretty important that they understand the risk profile of the companies they are investing in.”
Lont said the study found that equity markets experienced a 0.42 percent loss in the first 20 days of a heat wave, and more if it continued. Investor losses grew to 1.38 percent for more severe weather events and smaller firms were more vulnerable. The most exposed firms lost from 1 to 2 percent of their market value.
The study also found a negative response from investors had increased in recent years, as extreme weather and climate change gained more media coverage.
Lead author Paul Griffin, from the University of California, says there are risks to continued under-pricing of climate risk.
“Barring more drastic action to curb and disclose corporate emissions, if asset prices continue to under-price extreme weather climate risk, this could have devastating future market consequences,” he says.
“Our finding of physical climate risk under-pricing has important implications for the design of low carbon risk portfolios by managers of investment funds, especially funds devoted to public and private pension plans. Some fund managers already assume climate risk under-pricing. Our study confirms this.”