Until recently, climate risk was a distant externality, largely uncaptured by market mechanisms and only partially reflected in asset prices. However, this is changing.
Climate risk will increasingly be reflected in market prices, leading to a potentially dramatic repricing across asset classes, sectors, companies and individual securities. Indeed, it is no longer a matter of if this repricing will occur. Rather, the real question is whether the transition will be an orderly one ushered in by government measures and gradual market adjustments, or an abrupt, sharp decline in market sentiment triggered by a series of climate “Minsky moments.” Regardless of the trajectory, the implications for investors’ portfolios will be very significant.
Holistic Portfolio Impact
Overall, climate change presents a set of multidimensional risks that are difficult to capture and empirically analyse using historical data and linear models. The potential impact of rising sea levels and flooding on coastal cities like Mumbai and Miami is apparent. What is less evident are the hidden risks embedded in individual companies and portfolios.
In fact, these hidden risks are material for a range of industries not commonly thought of as highly exposed to climate risk. Likewise, the best opportunities for investors may not be conveniently branded as “green.”
In other words, a simplistic strategy that divides the investment world into “brown” villains and “green” heroes is not the most effective approach to achieve environmental or fiduciary objectives.
How do institutional investors develop an action plan to consider the holistic impact of climate change across their portfolios?
Co-hosted with PGIM, this webinar will examine how assets will be repriced as climate risk alters the behaviour of market participants:
- What aspects of climate change are already reflected in market prices? What aspects are not?
- Why have prices in some markets so far not reflected climate risk?
- What catalysts might cause markets to reprice assets, either gradually or abruptly?
David Klausner is a Director in the Thematic Research group at PGIM, the investment management business of Prudential Financial, Inc. He is responsible for researching and authoring PGIM’s megatrend thought leadership series. Prior to joining Prudential, he was Director of Research at a boutique consulting firm in Ulaanbaatar, Mongolia, where he led economic and market studies for international financial institutions such as the World Bank and Asian Development Bank, as well as for a broad range of private clients. He began his career in the Financial Leadership Development Program at Prudential.
David received his Master’s in Public Policy from the Harvard Kennedy School, his Master’s in Global Finance from New York University and Hong Kong University of Science and Technology, and his BA in Economics, with a minor in Political Science, from Tufts University.
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