Climate change is starting to influence Wall Street

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When one stops to ponder the implications of climate change, investment options aren’t usually the first subject that comes to mind. Interestingly, a new piece of research conducted at the University of Texas at Austin finds that climate change beliefs are starting to seriously influence the financial decisions being made by some of Wall Street’s most prominent investors.

Climate change is a hot topic these days, being discussed and debated in coffee shops, classrooms, and news programs all over the country. It’s a divisive topic with major political overtones, but regardless of how any one person feels about its legitimacy, there’s no denying its front and center in the minds of millions of Americans. 

The research team at UT’s McCombs School of Business surveyed 439 institutional investors, and a whopping 97% flat out said that global temperatures are on the rise due to climate change. On top of that, over 50% are already factoring in climate risks when making investment decisions.

“These investors have accepted that climate change is happening,” comments Laura Starks, a finance professor at Texas McCombs, in a press release. “They’re trying to come to terms with how it’s going to affect the risk and return of their portfolios.”

Besides just individual investors, financial institutions are also starting to take environmentally-friendly action. Many have started asking companies to catalog their carbon emissions, while others are supporting climate change motivated shareholder resolutions. If the companies’ subsequent responses to these requests are unsatisfactory, institutions will divest shares. 

While the idealists among us would like to believe these institutions are making such changes for the good of the environment, the real answer is in all likelihood much more practical. More and more millennials are investing their money each year, and it’s no secret that climate change is a very important subject for young people. If today’s modern financial juggernauts can appear to be eco-friendly, many young investors will be that much more likely to utilize their services.

Young people are also increasingly interested in investments that can prove both profitable and ethical, such as low-carbon bond funds.  

“They’re going to inherit a lot of money from baby boomers,” Starks says. “So institutional investors have a heightened interest.”

In the future, it’s likely that this trend will become even more prevalent. Among all the study’s surveyed participants, 91% believe that climate risks and changes will be financially influential on all of their investments within the next five years.

These aren’t novice investors either; among the study’s 439 participants 31% were C-level (CEO, COO) executives, and 48% reported managing over $100 billion in assets. Talk about movers and shakers. That being said, only 10% of participating financial institutions said that climate change is their top priority. Most admitted that more traditional concerns, such as standard operating risks, are still a more pressing day-to-day discussion in their boardrooms.

Here are a few other fascinating statistics discovered by researchers: just the possibility of new climate-centric regulations is already influencing 55% of participants. Meanwhile, 66% are afraid that weather-related calamities like extreme storms, rising sea levels, or wildfires will have a big impact on their assets. Another 78% fully expect more environmentally friendly technologies to largely replace carbon assets over the next five years.

“The Paris accord means that different countries are going to have to start regulating carbon emissions more,” Starks notes. “If you’re an automaker, the gasoline engine is going to be on its way out. You may have to go more towards electric vehicles. Are you being managed so that you can adapt to these changes?”

With these revelations in mind, it isn’t all that surprising that more and more investors are becoming wary of carbon-related stocks. For instance, 17% said that current oil share prices are seriously overvalued. Others expressed the same sentiment regarding automakers (14%) and electric utilities stocks (13%).

So, on an individual level, how are these investors trying to protect themselves from climate-change related changes in the market? In all, 38% are taking a hard look at the carbon-footprints being produced by their own investments, and 24% are making potential climate risks a top consideration when thinking about a new investment.

Many of the study’s participants have taken their concerns to corporate managers. Close to half (43%) have discussed climate risks in general with managers, while 32% have actually suggested actions that companies can take to reduce their carbon footprint. Of course, companies’ responses to these inquiries aren’t always satisfactory. A significant 30% of surveyed investors have already submitted shareholder proposals, with one example being a 2017 request for Exxon Mobil to release predictions regarding how climate change may impact their business in the future.

When all else failed, 20% even went so far as to publicly criticize a company’s management, take legal action, or sell their shares.

Overall, these findings paint a picture of an evolving financial landscape that is becoming more and more environmentally conscious by the day. While the ethics of major financial institutions is certainly debatable, history has proven that such entities will do whatever it takes to protect their bottomline. 

“A company becomes more aware of what’s in their carbon footprint, because someone is watching,” Starks concludes. They’re just starting to deal with this. If we gave this survey again in three years, I think we would see a lot more evolution in their approaches.”

The full study can be found here, published in The Review of Financial Studies.