What Do You Think About Climate Finance?

[What sustainable investors actually believe 2/5]

Are asset prices telling the truth about climate risk?

Johannes Stroebel and Jeffrey Wurgler put that question to the people who study, trade, and regulate financial markets in their paper "What Do You Think About Climate Finance?".

They surveyed 861 finance academics, private-sector professionals, and public-sector regulators and policy economists in July 2021, through a short anonymous questionnaire with a 7.5% response rate.

Respondents ranked five types of climate risk over 5- and 30-year horizons, judged how well markets price climate risks, and proposed discount rates for a mitigation investment with benefits arriving in 50 years.

They also selected the most powerful forces for corporate change as well as the most important climate finance research topics. Their main conclusions include:

• Respondents overwhelmingly believe markets underprice climate risks: those saying stock prices reflect these risks "not enough" outnumber those answering "too much" by 60% to 3%.
• Regulatory risk ranks as the top climate-related risk to businesses and investors over the next five years, while physical risk dominates over 30 years.
• 73% of private-sector respondents see equities underpricing climate risks against 51% of academics, who hold a stronger prior that markets are efficient.
• Carbon taxes (cited by 52%) and pressure from institutional investors (48%) are seen as the strongest forces pushing companies to decarbonise. No respondent counted on voluntary corporate action alone.
• The median respondent would discount certain mitigation benefits arriving in 50 years at 4% per year and uncertain benefits at 7%, implying a 3% premium on climate mitigation investments.

This article highlights a consensus of underpricing, which implies either a large collective error among experts or carbon-heavy exposures that still offer compensation for risk.

If the most informed observers are right, current market prices are not a reliable summary of climate exposure, and repricing scenarios belong in asset allocation more than in tail-risk appendices.

A 7.5% response rate however skews selection towards climate-interested respondents, and the survey measures stated beliefs rather than actual positions or prices.