Morningstar Investor users sign in here.

Stocks

Listed companies dodge worst effects of climate change

Climate disasters have not had a huge impact on share markets globally, according to a new study from the International Monetary Fund.


But smaller economies with more limited capacity to respond to disasters and climate threats will wear the greatest effects, the IMF study finds.

The IMF has measured the impact of climate disasters on stock market indexes in a new study, Equity Investors Must Pay More Attention to Climate Change Physical Risk. The IMF has examined around 350 large climatic disasters over the past 50 years in a sample of 68 economies, representing 95 per cent of global GDP.

The average effect on stocks was modest: a drop of 1 per cent for market indexes overall and 2 per cent for banking stocks.

However, in 10 per cent of cases, the impact on the aggregate market has been greater than 14 per cent, “indicating that some climatic disasters can have a meaningful effect on financial stability,” the study authors Felix Suntheim and Jérôme Vandenbussche found.

Nathan Zaia, banking analyst for Morningstar, says that If a severe weather event causes a large economic shock, Australian banks would be unable to escape given they lend to almost every industry and to individuals.

“It is hard to say what risks are priced into a share price, but we do not think climate risk is top of investors mind when it comes to banks,” Zaia says.

Given the highly leveraged businesses of banks, which are inextricably tied to the strength of the economy, they’re always vulnerable to economic downturns ¬– whether they’re caused by climate, health crises or other factors.

But as in the current example of COVID-19, government stimulus can buffer the impact on banks.

“With Australian banks heavily exposed to mortgages, the flow on impact to unemployment and the ability of borrowers to service loans would be key.

“It’s also important to take into consideration the impact on share prices, versus the impact on underlying earnings, which may not be as severe,” says Zaia.

Big impacts possible
The IMF study found that the 2011 Thai floods had the largest damage relative to the economy’s size, amounting to around 10 per cent of Thailand’s GDP. The floods triggered a 30 per cent drop in the stock market over 40 days.

In the US, Hurricane Katrina had the largest damage in absolute terms at 1 per cent of US GDP, yet it had “no discernible impact” on the US stock market.

The study finds that countries with more “fiscal space” such as the US and Australia, can more swiftly respond to the disaster in the form of financial relief and reconstruction efforts.

“Also, well-developed risk-sharing mechanisms such as insurance reduce or redistribute the disasters’ losses and limit the impact on equity prices,” Suntheim and Vandenbussche found.

The IMF researchers found that over the past decade, direct damages of climate disasters are estimated to add up to around US$ 1.3 trillion (or around 0.2 per cent of world GDP) on average, per year.

Some investors ignore risks
Looking back at 2019 equity valuations across countries, many equity investors did not account for commonly discussed global warming scenarios physical risks in their investments. “This apparent lack of attention could be a significant source of market risk looking forward,” Suntheim and Vandenbussche found.

According to Morningstar’s ESG specialist research firm, Sustainalytics, some investors are avoiding climate disasters by not investing in companies involved with fossil fuels such as coal, which contribute to global warming.

Yet for every investor that backs away from fossil fuels, there may be another willing to do business with or invest in that company.

“The important commitments and steps by investors and miners to walk away from coal are necessary, but divestment alone may take too long to make a meaningful difference.

“Additionally, cutting a financial relationship means losing leverage to influence change, engage with management, and vote,” say Enrico Colombo, Sustainalytics’ manager Asia Pacific research and Frances Fairhead, senior associate mining research.

They suggest a better way must be found to deal with coal, pointing to the example of Australian mining company Genex Power.

Genex converted an abandoned gold mine in Australia into a pumped hydro project, giving a second life to a mothballed asset and maintaining economic activity around it. Similar projects are in early stages in the US to turn old coal mines into solar farms.

According to Sustainalytics, sustainable investing is growing rapidly with more than US$85 trillion ($122 trillion) in assets under management from signatories to the Principles for Responsible Investing.

The growing number of sustainable assets means investors are becoming more sophisticated in their use of information and data on environmental, social, and governance factors within their investment portfolios.

Climate change stress testing can also provide financial organisations such as banks with a better understanding of the size of their exposures and the associated physical risk, say the IMF’s Suntheim and Vandenbussche.

 



This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria. 

© 2023 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This report has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or New Zealand wholesale clients of Morningstar Research Ltd, subsidiaries of Morningstar, Inc. Any general advice has been provided without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782.

More from Morningstar

7 charts on the AI stock boom one year after ChatGPT’s launch
Stocks

7 charts on the AI stock boom one year after ChatGPT’s launch

These stocks and the key trends behind them are critical for understanding the AI investment landscape.
Why Berkshire Hathaway’s success will continue after Charlie Munger ... and Warren Buffett
Stocks

Why Berkshire Hathaway’s success will continue after Charlie Munger ... and Warren Buffett

Munger’s passing is a spiritual loss for the company.
Morningstar initiates coverage on 3 new shares
Stocks

Morningstar initiates coverage on 3 new shares

There are 2 undervalued names as part of our new coverage. 
3 shares for income investors
Stocks

3 shares for income investors

A dividend screen is a jumping off point for further research.
What we think of Morningstar subscribers' most traded share
Stocks

What we think of Morningstar subscribers' most traded share

This stock was the second largest ‘buy’ for 2023 and was also the second largest ‘sell’ for Morningstar subscribers.
How to build an income portfolio
Stocks

How to build an income portfolio

Investors love dividends but creating an income stream involves more than just picking the highest yielding shares.