Wellington Management
June 29, 2020
Tracing our history to 1928, Wellington Management is one of the largest independent investment management firms in the world. We serve as a trusted adviser for institutions in more than 60 countries.

Why aren't markets repricing rising climate risks?

MARK CARNEY, BANK OF ENGLAND GOVERNOR AND FORMER CHAIRMAN OF THE FINANCIAL STABILITY BOARD, ONCE STATED: “Past is not prologue, and the catastrophic norms of the future can be seen in the tail risks of today.” This notion is readily apparent in the context of climate change, where physical risks are rising with each passing year.

Secular shifts in atmospheric conditions are increasing the risk of severe climate-related events. This trend, which shows no signs of mean reversion, is the basis of our  ongoing research with Woods Hole Research Center (WHRC)  on the physical effects of climate change and their impact on capital markets. Our work with WHRC has found evidence that in many parts of the world, the probability of so-called hundred-year events, including devastating hurricanes, supernormal rainstorms, and inland floods, is rising. Despite this trend, policymakers, market participants, and the general public appear to be underestimating the risks, including the potential for negative market impacts.

The continued mischaracterization of rare climate events as one-time occurrences rather than part of a changing pattern may be a reason why climate risk remains abstract, hampering proactive behavior, policy change, and asset repricing. We believe that if markets had better access to climate probabilities, particularly the cumulative risk of occurrence over multiyear periods, they would better appreciate the severity and accurately reprice these risks.

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Views expressed are those of the author and are subject to change. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional or institutional investors only.

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