When investors contemplate risk, it’s straightforward to think about measurable economic shifts like rising interest rates, inflation and sales trends. The data are readily available and simple enough to incorporate into financial models. The looming risks from climate change, on the other hand, often elude money managers. While they know that it’s likely a mistake to not incorporate threats such as extreme weather into company valuations, and that climate change will impact most of the stocks already in their portfolios, few investors are making the calculations.
The problem? Access to comprehensive environmental data is expensive, corporate disclosures are inconsistent, and drawing links between climate science and financial returns is an interdisciplinary challenge. “There’s a market failure to really understand and appreciate the potential impacts of the physical changes that climate change will bring to the global economy,” says Rick Stathers, climate lead at Aviva Investors, a global asset manager. “I think that’s severely underplayed at the moment.”