equities

Are climate risks priced?

Are climate risks priced?
Alexey Medvedev, PhD - Portfolio Manager

Alexey Medvedev, PhD

Portfolio Manager
Julien Royer, PhD - Quantitative Analyst, Multi Asset

Julien Royer, PhD

Quantitative Analyst, Multi Asset

 

Stocks that are perceived to be riskier should trade at discount relative to peers. From this point of view, the consistent underperformance of high-carbon stocks seems to be a puzzle as these stocks are clearly most exposed to risks of climate transition.

 

Need to know

  • In our previous paper, we documented a consistent outperformance of low-carbon stocks which seemed to indicate that the climate risk had not yet been priced
  • In this note, we look at the performance of a broader “climate factor” and find that it is consistent with the positive risk premium in climate-sensitive stocks
  • In our view, this observation suggests that the success of low-carbon investing might be only a transitional phenomenon driven by investment flows
  • It is therefore time to take the climate factor into account to have a better control on portfolio performance

 

In this piece, we take yet another attempt to resolve the low-carbon puzzle by using a market-based approach to measure stocks’ climate exposure.

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