Companies in carbon-intensive industries must cut their emissions or face asset devaluation and stock prices fall.
That’s the warning from a new University of Waterloo study which predicts that the effects will be felt across the stock market in as little as 10 years’ time.
Lead author Mingyu Fang, a PhD candidate in Waterloo's Department of Statistics & Actuarial Science, says that the impact for carbon-intensive industries will be realised when the markets begin correctly pricing climate change risk.
"More specifically for the traditional energy sector, such devaluation will likely start from their oil reserves being stranded by stricter environmental regulations as part of a sustainable, global effort to mitigate the effects caused by climate change,” says Fang.
Dual risk for investment portfolios
For investment portfolios, the study highlights the dual risk. Firstly, physical risk to real properties from climate-related weather incidents; and secondly, from stricter regulatory and compliance costs related to carbon emissions.
"It is in the best interest of companies in the financial, insurance, and pension industries to price this carbon risk correctly in their asset allocations," said Tony Wirjanto, a professor jointly appointed in Waterloo's School of Accounting & Finance and Department of Statistics & Actuarial Science, and Fang's PhD thesis supervisor. "Companies have to take climate change into consideration to build an optimal and sustainable portfolio in the long run under the climate change risk."
The study, "Sustainable portfolio management under climate change" was published recently in the Journal of Sustainable Finance & Investment and Fang will discuss the research, and how to practically apply the principles of sustainable investing with representatives of the Bank of Montreal and the Society of Actuaries during the Climate change, Carbon Risk and Sustainable Investment Webcast on December 4, 2018.
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