Why are investors not pricing in climate-change risk?

COMPANIES ARE often quick to tout their green credentials. So are many of the sophisticated institutional investors who buy and sell their shares. Yet when it comes to pricing the risk of climate change, those investors may be falling short. New research suggests that the risk of climatic disasters such as floods, storms and wildfires are not reflected in the price of equities around the world. What is more, when disasters do occur, the fall in share prices is modest.

Researchers at the IMF studied the impact of 6,000 large climate-related disasters on stockmarkets in 68 developed and emerging countries since 1980. They found that financial losses related to such disasters have varied widely. Hurricane Katrina, in 2005, killed 2,000 people and affected half a million. It also had the largest absolute economic impact of any event in the researchers’ sample, costing 1% of American GDP. Yet the American stockmarket scarcely budged. Floods in Thailand in 2011, which killed 813 people and affected 9.5m, had the biggest relative economic effect, inundating South-East Asia’s biggest carmaking industry and costing 10% of Thai GDP. The Bangkok stockmarket collapsed by 30%. But overall, the researchers found that share prices were little affected by climate disasters. They lost just 1%, on average, in the days surrounding such disasters (see left-hand chart). The decline in fact starts before catastrophe strikes, because weather forecasters, and hence investors, can see storms coming.