IMF: Investors are Ignoring Climate Change Risks

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Guest essay by Eric Worrall

The International Monetary Fund is concerned rich people and money managers are ignoring their climate warnings.

Investors ignoring climate change risks, IMF warns

John Kehoe Senior writerMay 29, 2020 – 11.00pm

Sharemarket investors are failing to properly price in the risk of climate change inflicting damage on companies and economies, a new analysis by the International Monetary Fund has warned.

The Washington-based fund’s Global Financial Stability Report examines the impact of climate change physical risk on financial stability, including the loss of life and property as well as disruptions to economic activity.

The IMF analysed equity valuations across countries in 2019 and found that they did not reflect any of the commonly discussed global warming scenarios and associated projected changes in hazard occurrence or incidence of physical risk.

“This apparent lack of attention by investors could be a significant source of market risk looking forward,” said IMF financial counsellor Tobias Adrian.

“We need to step up climate-change stress testing and scenario analysis more generally as essential tools of climate change risk management.”

Read more: https://www.afr.com/policy/energy-and-climate/investors-ignoring-climate-change-risks-imf-warns-20200529-p54xp8

The following is the introduction to chapter 5 of the IMF report;

PHYSICAL RISK AND EQUITY PRICES

Chapter 5 at a Glance

  • The impact of large climatic disasters on equity prices has been modest in the past.
  • Climate change physical risk does not appear to be reflected in global equity valuations.
  • Beyond climate change mitigation and adaptation, sovereign financial strength and higher insurancepenetration help to preserve financial stability.
  • Stress testing and climate risk disclosure are essential to better assess physical risk.

The projected increase in the frequency and severity of disasters due to climate change is a potential threat to financial stability. Equity markets are a key segment of the global financial system, provide a data-rich environment, and are sensitive to long-term risks, making them fertile ground for investigating how projected future physical risk affects financial markets and institutions. Looking back over the past 50 years shows a generally modest impact of large disasters on equity markets, bank stocks, and non–life insurance stocks, although country characteristics matter. Higher insurance penetration and greater sovereign financial strength have helped dampen the adverse effects of large disasters on equity markets and financial institutions. While projections of climatic variables and their economic impact are subject to a

high degree of uncertainty, aggregate equity valuations as of 2019 do not appear to reflect the predicted changes in physical risk under various climate change scenarios. This suggests that equity investors may not be paying sufficient attention to climate change risks. Beyond policy measures to mitigate and adapt to climate change, actions to enhance insurance penetration and strengthen sover- eign financial health will be instrumental in reducing the adverse effects of climatic disasters on financial stability. Moreover, better measurement and disclosure
of exposures to climatic disasters are needed to facilitate the pricing of climate-change-related physical risks.

Read more: https://www.imf.org/en/Publications/GFSR/Issues/2020/04/14/global-financial-stability-report-april-2020#Chapter5

I used to work in finance. The investment managers I met didn’t trust the ability of models to predict the future, they used their models to understand the present. Ask the right questions over a few beers with a portfolio manager and they will tell you all sorts of cautionary tails of failed high fliers and bankrupt CEOs who mistook their model projections as reliable predictions of future market conditions.

Everyone I met in finance knew the story of Long Term Capital Management, whose spectacular crash defined the recklessness and financial model mania of the late 90s.

Despite the fund’s prominent leadership and strong growth at LTCM, a 2014 Business Insider article pointed out that there were skeptics from the very beginning:

Investor Seth Klarman believed it was reckless to have the combination of high leverage and not accounting for rare or outlying scenarios. Software designer Mitchell Kapor, who had sold a statistical program with LTCM partner Eric Rosenfeld, saw quantitative finance as a faith, rather than science. Nobel Prize winning economist Paul Samuelson was concerned about extraordinary events affecting the market.[18]

Economist Eugene Fama found in his research that stocks were bound to have extreme outliers. Furthermore, he believed that, because they are subject to discontinuous price changes, real-life markets are inherently more risky than models. He became even more concerned when LTCM began adding stocks to their bond portfolio.[18]

Source: Wikipedia

When climate scientists approach fund mangers, many of whom are top of the class Math and Physics PHDs, and tell them they have a model which can predict the future, I suspect that is a big red flag for people who have seen it all before.

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DMacKenzie
May 30, 2020 6:28 pm

Climate change is not a very large risk….Climate change LEGISLATION is an enormous economic risk.

davidmhoffer
Reply to  DMacKenzie
May 30, 2020 7:32 pm

THREAD WINNER!

First comment up too!

n.n
Reply to  DMacKenzie
May 30, 2020 10:29 pm

Political climate change is a clear and progressive risk.

fred250
Reply to  n.n
May 31, 2020 1:19 am

Political climate change is a clear and regressive risk.

Reply to  n.n
June 4, 2020 10:31 am

A beautiful cool, sunny day here in Canada… Hypocrisy = The Left say CO2 is a pollutant but then they advise us to wear a mask and make us breathe 100 times more CO2 all day to prevent dying from a virus that kills less than the common flu and common cold? Does anyone else see the irony? Call them out on this scam against the People! All here in Canada ask Justin Trudeau… Where is the Warming Waldeau?

Reply to  Trevor Marr
June 4, 2020 10:34 am

#canada #justintrudeau #climatescam #thankgod4fossilfuels

Hot under the collar
Reply to  DMacKenzie
May 31, 2020 6:02 am

Obviously, climate alarmists believe they know better than risk managers and insurers, who have assessed changing climate to be little or no risk to their business.

However, the risk posed by climate change alarmists and those they mislead, is considerable.

Trebla
Reply to  DMacKenzie
June 2, 2020 4:55 am

If these institutions are ignoring climate change risks, shouldn’t those at the IMF take advantage of their negligence by shorting the shares in said companies? It would be an easy way to make a profit and prove their belief in their assertions.

commieBob
May 30, 2020 6:31 pm

There are the risks everyone sees and those are priced into the market. The correct value for long term climate change risks is, as far as I can tell, approximately $0.00.

Some time before the 2008 crash, Nassim Nicholas Taleb warned that Black Swan events happen. Everybody thought he was a genius when the market crashed. He, on the other hand, took great pains to point out that he did not predict the market crash. He merely pointed out that market crashes, and other bad things happen and we don’t see them coming. If you’re in the market for long enough, you will experience such a Black Swan event. If you’re an investor, such events are far more consequential than the effects of global warming decades from now.

Latitude
May 30, 2020 6:40 pm

wealthy people tend to be intelligent….film at 11

Carbon Bigfoot
Reply to  Latitude
June 1, 2020 3:29 am

Latitute:
Exceptions: Soros, Gates, Bloomberg, Gates…I could go on.

Carbon Bigfoot
Reply to  Carbon Bigfoot
June 1, 2020 3:31 am

The other was Besos not the double Gates although he is doubly stupid.

May 30, 2020 6:41 pm

“Investors ignoring climate change risks”

In the field of finance, investor behavior is the data from which we learn and deduce valuation. That climate science is now preaching to the market and dictating investor behavior does not tell us what is wrong with the market. It tells us what is wrong with climate science.

https://tambonthongchai.com/2019/02/03/hidden-hand/

Tom Sash
Reply to  Chaamjamal
May 30, 2020 9:59 pm

Chaamjamal, What a great comment! Kudos! There is no better mechanism in the world than its markets to provide information of and for the future and what the “real” risks should be and what they should be priced at.

Rod Evans
Reply to  Chaamjamal
May 30, 2020 11:45 pm

+100 well said.

sky king
May 30, 2020 7:09 pm

These IMF genuises are free to short the market anytime. I wonder if they ever put their money where their mouths are?

BobM
Reply to  sky king
May 30, 2020 7:32 pm

They need to have a chat with Warren Buffet. He knows what he’s talking about. These climate folks don’t.

Earthling2
Reply to  Eric Worrall
May 30, 2020 8:58 pm

Did anyone else just experience a 300% increase in Condominium insurance like many did on the west coat from California to British Columbia this spring? And it being blamed on climate change already because of some floods in flood plains and fires in cities that refuse to manage their forest adjacent to their cities? And new earthquake risk from new scientific studies saying we are getting closer every day to the big one, and cash reserves need to be ‘topped’ up to be ready to make big payouts.

Sounds to me like these insurance and re-insurance companies still have a licence to print money, especially when the condo markets and any mortgaged home needs to have insurance by bank policy or law in the case of Strata Acts. And of course, this is where Warren makes a fortune. He understands the insurance markets very well. The only way to get even with these companies is to buy their stock, and you get some of your money back as a dividend and hopefully a capital gain. Pays my insurance premiums, or at least it used to.

old construction worker
Reply to  Earthling2
May 31, 2020 12:37 am

More reason to move inland and save 300% increase in Condominium insurance.

Tom in Florida
Reply to  Earthling2
May 31, 2020 6:07 am

From my experience, most large increases in property insurance are due to the property being under insured. Rising property values and replacement costs are major factors in determining rates. Upgrading repairs to current codes and cost of materials drive up the replacement costs

Ken Irwin
Reply to  sky king
May 31, 2020 4:04 am

Sky King – spot on.

A tiny (possibly non-existent) risk decades away discounts to virtually no Nett Present Value.

That’s how T Boone Pickens took Gulf Oil – they had thirty years of reserves but were spending on exploration – canning those costs raised the stock – the benefits 30 years away did not warrant the current costs.

Gordon A. Dressler
May 30, 2020 7:22 pm

Wait a minute . . . on the advice of a climate change alarmist, I went long on sunspots in the international commodities market, basically “all in”. The last two years of solar inactivity have wiped me out.

A hard, bitter lesson learned: never use climate change™ to guide your financial investments!

Quilter
May 30, 2020 7:36 pm

The thing that the IMF forgets is that while they play with other people’s money, the investor plays generally with their own. I think that alone is a pretty good assessment of the real value of climate risk ie very little. As one of the comments above says however, climate legislation is a whole different ball game and some of the politicians that want to spend our money are beginning to wake up to the fact that the more money that gets taken from us for subsidies and other graft, the less there is remaining for them to buy some of us off.

Walt D.
May 30, 2020 7:45 pm

There is a horse that has finished last in all 20 races it has ever run. The IMF is warning bookmakers that this horse could be the next Brigadier Gerard and if the bookies keep offering 100-1 odds that they will all be wiped out if the horse starts winning.

J Mac
May 30, 2020 7:47 pm

The nonexistent ‘risks’ of climate change are ignored. Reality based risks are priced accordingly and/or hedged.

yarpos
Reply to  J Mac
May 30, 2020 8:13 pm

+1 exactly

May 30, 2020 7:48 pm

I’m from the financial world. Money talks, B******t walks.

Keep walking …

Richard (the cynical one)
May 30, 2020 7:56 pm

Ignoring AGW hot air spewing fools is a decent financial strategy. It would be even better for everyone, including for the environment , if those fools would just shut up and look at reality.

Lowell
May 30, 2020 8:28 pm

If the people at the IMF were smart enough to value stocks they would be worth tens of millions or billions and they would not be working in the IMF.

I read their article and it was full of gobbledygook. They throw find sounding words on a page that mean nothing.

Alan
May 30, 2020 9:07 pm

I’ve always found it interesting that people who push climate change have no problem building mansions along the coast. Hmm.

Pat from kerbob
May 30, 2020 9:14 pm

Clearly investors assign little danger to climate change and insurance companies keep covering their projects

That shows the reality of “climate emergency”.

Earthling2
May 30, 2020 9:36 pm

A fool and their money are soon parted. When the subsidies start coming off intermittent renewables, and they will as we just saw in Mexico, then these ‘renewable’ companies that are trading at unheard of multiples with a boat load of debt, will be worthless. Worse than worthless, as they will have these worthless non producing assets to get rid of, or walk away from and lose any posted bond if any. And the tax payer will be on the hook for their clean-up, after having paid these shysters huge bonuses and set up fees and the debtors and common stock holder will be left holding the bag. Anyways, their generation assets expire or degrade after 15-20-25 years, or need major repair and replacement and can’t even be recycled. What will they be worth then? That will be priced in well in advance of their ‘retirement’.

The electrical grids are reaching saturation with junk asynchronous electricity making them unstable and the power engineers are already stating they can’t do miracles and keep the grids stable with intermittent renewables that take priority over hydro and other potential base load shedding to accommodate them. Or pay them not to produce like excess wind or solar at noon for 4 hours. I would say investing in something that the IMF thinks is valuable, (intermittent renewables for e.g.) will turn out to be a big loser in the long run. Follow the money long term. Future climate change risk may as well be run by a group of astrologers or tarot card readers, or dart throwing chimps. We have no idea what the long term climate will be, other than the odds are much greater it will oscillate to cooler than warmer, which should be the real issue. But I bet that won’t even be a distant consideration, having fixated on things just getting hotter and hotter until we are roasting. Starting to sound like Dante’s Inferno, just a different ‘sin’ this time. Just pay your indulgence and shut up.

n.n
May 30, 2020 10:27 pm

They must believe. Why don’t they believe. We know what’s best.

Graemethecat
May 30, 2020 11:40 pm

Mediocre asset managers lose money and get fired, leaving only the capable ones. Mediocre Climate “Scientists” get promoted.

Rod Evans
May 30, 2020 11:54 pm

Seriously? Financial investment advice from the IMF….really? The last two leaders of that organisation, were/are convicted for illegal financial activities!!
Just saying.

Zigmaster
May 31, 2020 12:07 am

I think there are huge climate change risks not accounted for at the moment. I think we are one Michael Moore documentary away from potential collapse of the climate change industry. Companies which incorporate climate change risks into their principals will be shunned. Go woke go broke will become a reality. Companies that acquiesce to demands of activist holders will quickly realise that the more they respond to activist shareholders the more they will demand. Banks who think its smart to lend to the renewable industry and ignore coal and other base load providers will be in for a rude shock.
I’d give it 2-3 years but renewables will be slowed completely by then and that grid reliability and cost will start hitting home big time.
If Donald can manage to be re-elected I think that this demise could be accelerated.

Matt_S
May 31, 2020 2:27 am

When its proponents buy beach front property, what do you expect?

cerescokid
May 31, 2020 2:44 am

IMF analyzed equity valuations

In a world where 4pm that day is short term and next week Friday is long term, there are not many investors on Wall Street who focus on what may or may not happen 20 or 30 years from now. Plus, they probably have accumulated the entire list of failed predictions over the last 30 years, including the ones about no more ski resorts, when they were able to ski into June last year. Quarterly results rule. They always will.

The big money is more worried about coming out of the lockdowns and the lasting damage of COVID19 to economic growth.

Paul Stevens
May 31, 2020 3:47 am

Two winners in the first four posts. Outstanding work WUWT posters.

ColMosby
May 31, 2020 3:49 am

Notoice if you will, how technology ignorance and avoidance is being practiced by thee “future doomsday predictors.” They totally ignore the obvious coming avalanche of small modular nuclear reactors, mainly molten salt variety, as well as the couldn’t-be-more-obvious transition to electric vehicles. Battery prices have , or soomn will have, dropped below $100 per kWhr, a point at which it is generally acknowledged that electric cars
will be price competitive with gas powered vehicles, even while ignoring the obvious cost advanatges of the EVs over their lifespan. For those who claim to predict the future while ignoring the obvious future of technology ,
they obvious response is to call out these predictions as useless and ignore their claims.

fred250
Reply to  ColMosby
May 31, 2020 4:33 am

Yes, your claims need to be ignored, as they are fantasy predictions.

The Ford F series, all by itself, still outsells ALL EVs by some 5 to 1. !

If you imaging that EVs are in for a surge, you need to read up on supply engineering.

Joseph Zorzin
May 31, 2020 5:39 am

In latest Scientific American- “How to Set a Price on Carbon Pollution”. That’s the title of the article on the web site- but in the magazine, the title is “What Should Carbon Cost”.
Subtitled, “A smart combination of math and policy choices can determine a practical tax that will cut CO2 emissions”

No mention of course- of benefits of more carbon such as the greening of the Earth.

The first paragraph:
“Ask any economist how we should respond to climate change, and they will tell you that the most effective strategy is to put a price on greenhouse gas emissions, ideally through a carbon tax. This reflects a basic economic principle: the waste produced from any activity is a cost that has to be paid. We pay for throwing away our garbage, for cleaning our wastewater, and we should pay for the carbon dioxide waste we create from activities such as burning fossil fuels.”

ResourceGuy
Reply to  Joseph Zorzin
June 1, 2020 1:08 pm

I remember that publication. It stopped being scientific long ago.

TBeholder
May 31, 2020 5:54 am

In other words, however many people pretend, no one seems to act like they actually believe it.
Including the rich Foundations people who promote it.
It all goes per old Middle-Asian proverb: “dog barks, yet caravan walks”.
Also, admitting this wasn’t particularly smart of them.

Tom Abbott
May 31, 2020 5:57 am

From the article: “Sharemarket investors are failing to properly price in the risk of climate change inflicting damage on companies and economies, a new analysis by the International Monetary Fund has warned.”

To the contrary, I think they are figuring in the “risk” of human-caused climate change. They don’t see a risk. Otherwise, they would figure it in. Right?

Human-caused climate change has to exist before it can be a risk. To date, it has never been demonstrated that humans can cause the climate to change. If the IMF wants to live in a Nightmare Dream World, that’s their problem. Savvy investors live in the Real World.

John Bruyn
May 31, 2020 5:59 am

They have more sense than AGW believers and activists.

Earl Rodd
May 31, 2020 6:14 am

Let’s see. The geniuses at the IMF failed to warn investors of the risk of a Chinese virus escaping and wreaking havoc on the world economy?

observa
May 31, 2020 6:53 am

Yep all those movers and shakers keep pouring in the dough and driving up the prices of coastal/esplanade RE prices ignoring the great inundation and the dooming. When will they ever learn?

Rick
May 31, 2020 9:17 am

“Investors ignoring climate change risks, IMF warns”
In 2020 we blew up the world’s economy because models predicted disaster if we didn’t shut down and face the pandemic square on.
Investors are probably thinking, how can the economy get any worse than what we’ve experienced these past few months.

PaulH
May 31, 2020 9:26 am

“ESG investing is already taking a toll on state pension funds—now it might transform the world’s largest private asset manager, too.”

https://www.city-journal.org/blackrock-esg-strategy

It seems “ESG” (environmental, social, and corporate governance factors in investing) does not make for successful returns.

Bruce of Newcastle
May 31, 2020 4:48 pm

Of course they are ignoring “climate change” risks. They’re also ignoring the risk that flying elephants will land on their businesses like very heavy pigeons. Many business people can read a graph, unlike, it seems, the IMF.

Reply to  Bruce of Newcastle
May 31, 2020 7:17 pm

That’s different than the graph on the extreme weather page here on WUWT:

comment image

– JPP

Bruce of Newcastle
Reply to  Jon P Peterson
May 31, 2020 11:13 pm

That’s winter only. Mine is a graph of the all seasons data, with a regression line added. Here’s the up to date Rutgers page and dataset.

I’ve yet to hear a reason why or how snow can fail to melt due to all the global warming that’s supposed to be happening.

BC
May 31, 2020 4:56 pm

When they say ‘price in the risk of climate change’ perhaps they are actually referring to the risks from expensive, unreliable renewable energy! That is a tangible risk and it can easily be costed.

Bill Powers
June 1, 2020 6:37 am

What?!!!!?

Rich people with money aren’t listening to officious, self serving, job securing, bureaucrats?

ResourceGuy
June 1, 2020 10:33 am

No wonder the Chinese went off and built their own replacement for the IMF and World Bank. They couldn’t stand the homeowner association meetings and policies either.

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