Stock Markets Underestimate Climate Risks, Finance Experts Say Press Release: Stock Markets Underestimate Climate Risks, Finance Experts Say

“We surveyed finance experts from the USA, Europe and Asia who are recognized as ‘Chartered Financial Analysts’ and we were surprised by the results,” says Florian Zimmermann from the EPoS Economic Research Center. “The majority thinks that climate risks are currently underestimated in the stock market. At the same time, however, more than 10 percent of respondents say that markets currently overestimate climate risks. So there is definitely a lot of disagreement among finance professionals.” Asked about the reasons for this inadequate assessment, opinions also differ.

Causes of mispricing

Many experts argue that other market participants have distorted views on the importance of climate risks and consider this the key reason why mispricing exists. The researchers find that the political leanings of professionals influence their views on the pricing of climate risks: Finance professionals who feel they belong more to the political left believe that other market participants underestimate climate risks. Conversely, respondents who feel they belong more to the political right think that other market participants overestimate climate risks.

Decarbonization of the economy

“The findings of our study are relevant to the current efforts to decarbonize the economy,” says Zimmermann. Financial markets are highly important for the efficient transition away from fossil fuels. Market participants assess climate risks and play a key role in determining the extent to which capital flows into climate-damaging business models or economic sectors. “The result of our survey, that most experts believe that climate risks are currently mispriced, is a cause for concern,” says Zimmermann. “Our finding suggests that considerable efforts are still needed to improve the evaluation of climate risks."

Better risk management required

The Federal Financial Supervisory Authority in Germany has called on the financial sector to be more sensitive to climate risks for a long time. In addition, the European Central Bank has been warning banks in the eurozone for years to better identify and manage climate risks. Failure to do so could result in fines. The deadline for the banks expires at the end of the year.

“It is high time that climate risks were adequately assessed and priced in the financial sector and on the stock market,” says Zimmermann. “This is a key prerequisite for the successful transition to a more climate-friendly economy.”