Could the stock market’s next black swan be climate change?
Fighting climate change is difficult partly because humans are weird. It’s difficult to get them to care about their own future well-being much less that of entire future generations. People blow retirement funds.
You think they care about their imaginary great-grandkids? But people do care about stock prices. Entire media empires and lucrative careers have been built out of talking about stock prices. Unlike the fuzzy details of unborn descendants’ lives, stock prices are concrete.
Line go up, line go down. Simple. So maybe this will get some attention: Climate change will be really, really bad for stock prices.
Failing to do more to slow the planetary heating caused by greenhouse-gas emissions will gouge 40% from global equity valuations, estimates a new study by the EDHEC-Risk Climate Impact Institute. Accounting for climate-change-pepping ‘tipping points’ such as Amazon-rainforest dieback or a Big Burp of gas from melting permafrost, market losses rise to 50%. On the other hand, if the world gets its act together and limits warming to 2° Celsius above pre-industrial averages, then the hit to stock prices will be just 5% to 10%.
A key thing to note here is that these won’t be one-time losses, lead author Riccardo Rebonato, a finance professor at EDHEC Business School in London and former Pimco executive, warned in a webinar. There will be no reversion to the mean. More likely is a long journey through the wilderness like Japan’s Lost Decades.
“After covid we had a massive GDP loss but then a rebound. Here it seems to be like a headwind, a continuous headwind, without a rebound," Rebonato said. “It could be the Climate Lost Generation in equity returns." The EDHEC paper forecasts much bigger stock-market losses than
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