Climate Risk and Asset Repricing

Most of us follow the markets and interest rates on a day-to-day basis, and this takes up a lot of time and attention because they tend to have a more short-term and immediate impact on markets.  Yet, climate change by comparison is often viewed as a slower moving issue that we don’t know when or where will strike next.  Despite the increasing storms, fires, floods, and droughts we are currently experiencing, we still hear a lot about 2050 or 2100 being the time of major impact, and so we tend to ignore many of the day-to-day factors that happen and brush them off.

Yet, behind the scenes, rating agencies are not operating with this mindset.  Over the last several years, companies like MSCI, Moody’s, Sustainalytics, and ICE have spent serious amounts of money analyzing climate data and acquiring risk data companies.  As examples, Moody’s now owns climate data and risk analysis leader Four Twenty Seven, while ICE recently acquired risQ and Level 11 Analytics.  The cost of climate risk pricing in the markets has already begun, which is why we coined the term The Great Repricing, meaning the gap between the data that is available to measure risk and the time it takes for the markets to price in this risk.

We believe that RIGHT NOW is the time to evaluate portfolios to eliminate climate risk where possible. While it is sometimes difficult to get supply chain risk information on every company, we’ve included asset managers in our UMAs and thematic SMAs like Wellington Management, who’s partnership with Woodwell Climate Research Center enables them to better predict the frequency and intensity of climate change events and offer increased climate transparency to the equity markets.

Through their longstanding relationship with Woodwell Climate Research Center, Wellington is expanding the intersection between the capital markets and climate change. They are also sharing this research with issuers to encourage them to develop a strategy towards carbon-reduction targets.

Many people still have very different opinions and beliefs about climate change, but at this point, from a financial point of view, it really doesn’t matter what we think about it.  Nearly all reinsurers at this point are thinking about climate change as a fact, and nearly all rating agencies and more asset managers are doing the same: pricing in risk, knowing that the markets generally move very slowly and then all at once.

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