by Harleen Kaur Dhillon
Mingyu Fang, PhD Candidate in UW’s Department of Statistics and Actuarial Science, recently provided evidence that if companies don’t comply with environmental emission standards, they stand to lose value in the stock market in the next ten years.
The study was published September 2018, and explained that climate change risk would be priced appropriately in the stock market in the near future, and global efforts against climate change will make unsustainable energy more difficult to upkeep.
“Companies from the carbon-intensive sectors that fail to take proper recognizable emission abatements may be expected to experience fundamental devaluations in their stocks when the climate change risk gets priced correctly by the market,” Fang, the lead author, said. “[Such] devaluation will likely start from their oil reserves being stranded by stricter environmental regulations as part of a sustainable, global effort to mitigate the effects caused by climate change.”
“Those companies may find that large portions of the reserves are at risk of being unexploitable for potential economic gains,” they said.
Climate change has significant effects on the stock market.
First, it directly affects physical properties and infrastructure, leading to increased market risk. Second, it indirectly affects the creation of more environmentally stringent policies on emissions, which would cause downturns in carbon-intensive industries.
The indirect effect is called the investment carbon risk and can become a political risk to some asset classes.
Tony Wirjanto is a professor jointly appointed in Waterloo’s School of Accounting & Finance and Department of Statistics & Actuarial Science, and Fang’s PhD thesis supervisor.
They believe that companies need to start considering carbon risk for their assets to create a more sustainable portfolio.
“It is in the best interest of companies in the financial, insurance, and pension industries to price this carbon risk correctly in their asset allocations,” Wirjanto said. “Companies have to take climate change into consideration to build an optimal and sustainable portfolio in the long run under the climate change risk.”
The study, titled Sustainable Portfolio Management Under Climate Change, was published by Fang, Wirjanto and Ken Seng Tan, another of Fang’s PhD thesis supervisors, in the Journal of Sustainable Finance & Investment.