Markets already pricing long-term climate risk, new study shows. Here’s how.
Rate premiums on seaside assets reflect specific future costs and value estimates.
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(Mark Hulbert, an author and longtime investment columnist, is the founder of the Hulbert Financial Digest; his Hulbert Ratings audits investment newsletter returns.)
CHAPEL HILL, N.C. (Callaway Climate Insights) — The financial markets may be doing a better job than previously thought when accounting for the long-term risks of climate change, according to a recent study.
This is encouraging, since many previous studies had concluded that the markets are too obsessed with near-term results to play a helpful role in mitigating climate change. As I wrote in this space a couple of years ago, a major 2007 study in the American Economic Review found that the markets are “short-sighted and neglect information beyond a horizon of four to eight years.”
Though climate researchers tell us that we’re already dealing with climate-change-related disasters, most everyone would agree that the greatest climate-change risks won’t manifest themselves until several decades into the future at a minimum. Normal year-to-year variability in the weather plays a much larger role over the near term. If the markets neglect risks beyond an eight-year horizon, then those markets will largely fail to steer capital away from the most climate-destructive companies and towards those that will help cool the planet.
This new study that reaches a more hopeful conclusion about the markets is titled “Sea Level Rise Exposure and Municipal Bond Yields.” It recently began circulating as a working paper from the National Bureau of Economic Research. Its authors are Paul Goldsmith-Pinkham of Yale University, Matthew Gustafson of Penn State, Ryan Lewis of the University of Colorado Boulder, and Michael Schwert of the Wharton School.
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The researchers focused on the interest rates that school districts nearest the ocean must pay when issuing bonds. Since those bonds’ safety and security are dependent on the future cash flow that those districts receive, primarily from property tax revenue, sea level rise poses a big risk. Existing properties will decline in value because of both the greater flood risk as well as the exodus of district residents. That in turn will reduce those districts’ future revenue and increase the likelihood that their bonds will not be repaid.
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