The first study from this chair, titled “How Does Climate Risk Affect Global Equity Valuations? A Novel Approach“, addresses key limitations of current climate-aware valuation approaches to produce novel insights. It reveals that the impact of climate risk on global equity valuation can be significant, especially in scenarios with limited climate action.

The research introduces a novel framework that integrates asset pricing techniques with Integrated Assessment Models. It features a fully probabilistic treatment of economic and climate uncertainties, state-dependent discounting, and a consistent analysis of transition costs and physical damages.

Key findings:

• Overlooked factors: the uncertainty of climate and economic outcomes and the state dependence of discounting are two key and much neglected contributors to changes in equity valuation.

• Loss determinants: the magnitude of losses depends on the aggressiveness of emission abatement policy; the presence or otherwise of tipping points; on the extent of Central Banks’ willingness and ability to lower rates in states of economic distress.

• Downside risks: severe impact on equity valuation can be obtained with very plausible combinations of policies and physical outcomes, with significantly more downside than upside risk. Over 40% of global equity value is at risk unless decarbonisation efforts accelerate, and losses could exceed 50% with near climate tipping points.

• Benefits of prompt action: prompt and robust abatement action is needed to keep losses below 10%.

Learn more:

Watch the replay of our recent webinar featuring lead paper author Professor Rebonato, Scientific Director of EDHEC-Risk Climate Impact Institute, presenting the insights from the paper and discussing the implications for investors with Dr. Felix Goltz, Research Director at Scientific Beta. You can also access the presentation slides and explore the written Q&A.