Stranded assets and climate change risks have become reality in the financial markets. During last week the world largest pension fund, the Norway Pension Fund, NBIM, said that they have excluded 52 coal companies from their portfolio and the pension fund says that further divestments will follow during this year.
According to the Pension Fund this exclusion does not include for example the green bonds if the company has issued such an instrument to finance environmental projects and is being verified by a third partner.
Also in France, institutional investors are to disclose their climate impact and carbon risk exposure. But also the Bank of China and the Bank of England have been rising the awareness of the climate-related risks to the financial sectors.
For long-term passive investors, climate change poses a financial risk which is not priced in the markets. According to study “Hedging Climate Risk” by Mats Andersson (CEO, AP4), Fredrick Samama (Deputy global head of institutional clients at Amundi Asset Management) and Patrick Bolton (Professor, Columbia University, New York) hedging climate change is a possibility to maximize long-term returns while limiting political and timing risks. The writers argue that investor holding a decarbonized index is hedged against the timing risk of climate mitigation policies because the decarbonized indexes are structured to maintain a low track error to the benchmark index.
What happens then when company is disclosing changes in carbon footprint? According to writers inclusion in a decarbonized index should have a positive effect in the company valuation and vice versa. And companies, that are excluded, could more easily determine their carbon footprint ranking in their industry sector and how much carbon footprint reduction it would take for their stock to be included again in the index.
According to the study, in order to foster the engagement of financial markets with climate change, it is advisable to appeal to investors´rationality and self-interest.
– Any rational investor with a long-term perspective, should be concerned about the absence of a market for carbon and the potential market failures that could result from this incompleteness, they say.