Commentary

ICYMI, We’re Dealing with Short- and Long-term Risks

The IPCC’s climate report stole the headlines but failed to move the markets.

Delivered against a backdrop of extreme weather events, notably in Europe and North Africa, the first tranche of the Intergovernmental Panel on Climate Change’s (IPCC) sixth climate report was pretty much the only story in town this week. Not that you’d know it reading Monday’s market close stories from the world’s financial hubs.

The IPCC report said scientific evidence is now clearer that man-made activity is causing – and thus can slow down – climate change. In response, investors called on policymakers to implement policies to give the world the best hope of limiting climate change, targeting the least alarming of the five trajectories outlined by IPCC.

“We have to enhance ambition and tackle the climate crisis like the existential threat that it is,” Dr Jane Lubchenco, deputy director for climate and environment at the White House Office of Science and Technology Policy, told CNN. COP26 President-designate Alok Sharma’s calls for more action from the G20 were thrown back at him in a WWF study of UK climate policy.

In the report and the accompanying press conference, the IPCC made some fairly firm predictions about changes in climate patterns and sea levels, and slightly broader ones about the impacts of more intense rainfall. Not all could be regarded as decision-useful for investors. But did they not finally indicate that fossil fuel businesses have a very limited lifespan? Shouldn’t the oil and gas sector have dropped like a stone, or at least shuddered, following the loudest and clearest call yet by scientists to stop it from making the planet uninhabitable?

Oil prices and energy stocks did dip on Monday, while US stock indices trod water, caused by concern about weakening demand in light of likely slower GDP growth in major economies due to the spread of the Covid-19 Delta variant. Given the nature of renewable energy infrastructure investment, often supported via the private markets, it was less clear how the sector’s valuations responded to Monday’s report.

Back in the listed world, the IPCC report didn’t even make CNBC’s list of ‘5 things to know before the market opens’. Airlines took something of a hammering, not because of their transition challenges away from fossil fuels, but due to the continued impact of pandemic-related restrictions on this year’s passenger numbers.

In the “dog days of August”, there is rarely enough trading volume to cause a crisis, which is why most crashes really get going in September. But market reports were not entirely devoid of references to climate change. MarketWatch reported on an academic paper on the systematic undervaluation of climate-change risks by investment professionals.

Stock markets in particular can only really price short- rather than long-term risks. As evidence mounts that climate change is both, Norway’s sovereign wealth fund highlighted how it strikes balance with two new papers on managing climate change as a financial risk. TL;DR, dialogue on pathways to business model change, voting, divestment and exclusion are all part of the picture.

Angry Clean Energy Guy Assad Razzouk wondered on Twitter how long the IPCC report would dominate the agenda. An answer came on Wednesday, when the US National Security Advisor encouraged OPEC to turn on the taps in response to spikes in domestic prices, prompting historian Adam Tooze to suggest political will is wavering just when it’s needed most.

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