CAN CAPITAL MARKETS SAVE THE EARTH FROM THE CLIMATE CATASTROPHE?
In the vast majority, capital markets have not yet taken into account the risks of climate catastrophe, and only 14 percent of the experts surveyed believe that the risks are integrated into prices. The rise of green portfolios is also slowed by regulatory inconsistencies. However, the catalyst for change could be the recently concluded COP26 conference and government green programmes, according to recent research by KPMG.
What Research was Carried Out?
KPMG, CREATE-Research and the CAIA Association compiled a global survey entitled “Can capital markets save the planet?” based on interviews with almost 100 managers of investment firms and pension funds that manage $34.5 trillion.
What Were The Research Findings?
The research found that while capital markets attract a lot of capital, they cannot effectively price in the risks of climate change due to political, regulatory contradictions and insufficiently transparent financial impacts – and only 14 percent of those surveyed believe otherwise. For alternative investments, this figure is 11 per cent and for bonds it is only 8 per cent..
It is important to note that pricing climate risks is more clearly visible within the energy sector than it is noticeable in projects that are more capital intensive. This is because market access takes a long time.
Does Anything Affect The Research?
The biggest obstacle seems to be that, due to the nature of climate research, the impact of climate change on GDP is difficult to predict. The fundamental reason for this is that there is no similar historical history or experience of how our economic and financial systems can or will respond to these effects. The problem is compounded by the fact that governments and authorities that are supposed to support reducing CARBON emissions often do not move on a ‘trajectory’.
“For the time being, real action is well behind the definitions, so the potential and risks of climate change remain difficult to price
– Gergő Wieder, senior manager at KPMG.
To date, no country has introduced rules that adequately integrate environmental and social costs into companies’ financial reports, especially in a way that supports the pricing of climate risks. For this reason, the financing of market-based incentives and technologies to reduce CO2 emissions is progressing slowly. Development is also hampered by the lack of uniform pricing of emission quotas, which continue to play an important role in addressing the effects of climate change.
A Green Ray Of Hope
However, two events could be a turning point in this area. One is the green turnaround of the world’s major economies, which includes, among other things, the adoption of clean energy standards, the mandatory reporting of the carbon footprint for stock market companies, and the review of pension fund investments on the basis of ESG (environmental, social and governance) aspects. The other is the COP26 conference organised by the UNITED NATIONS.
What Changes Are Likely To Happen to avoid a climate catastrophe?
84 per cent of those surveyed said the Glasgow meeting would be followed by more coordinated intergovernmental measures and capital markets were preparing for expected progress in the three key areas – output pricing, alternative energy production and mandatory reporting.
When asked whether capital markets would start pricing in climate risks at a higher rate, 42 percent of respondents said yes, while 30 percent said they might, while 28 percent did not believe. More than 60 percent of respondents expect a shift towards pricing climate risks in all asset classes over the next three years.
The Drawback
The research notes that it requires huge, coordinated political efforts and support to steer trillions of dollars of investment towards carbon-reducing technologies. Some respondents fear that, in the absence of concerted action, current political trends will continue to allow risks to recover in the global financial system, at which point the ‘Minsky moment’ may occur – i.e. the price of securities may suddenly collapse as a result of a panic.
GDP = gross domestic product:
Gross domestic product (GDP) is a measurement that seeks to capture a country’s economic output. Countries with larger GDPs will have a greater amount of goods and services generated within them, and will generally have a higher standard of living.- www.investopedia.com
