Climate-Related Risks, Time Horizon, And Investment Policy: How Are They Best Integrated?

“In the context of climate change, it is as if we were modeling the scenarios of the Titanic hitting an iceberg, but excluding the possibility that the ship could sink. It is deeply concerning that what we see  happening in the real world is largely excluded from risk models widely used across the financial sector.”

Prof. Trust, University of ExeterJuly 2023

“The Titanic did in fact sink after hitting the iceberg, and many lives were lost. If we are to prevent global warming from becoming the global Titanic of the 21st Century, urgent ‘Net Zero’ actions are  required now.”

The Ambachtsheer LetterSeptember 2023

“We investigate financial experts’ beliefs about climate risk pricing and analyze how those beliefs influence stock return expectations. Most experts share the view that climate risks are insufficiently reflected in stock prices, yet they hold heterogeneous beliefs about the source and persistence of the mispricing. Differences in experts’ mental models explain the variation in return expectations.”

Profs. Bauer, Godker, Smeets, Zimmerman“Mental Models in Financial Markets: How Do Experts Reason About the Pricing of Climate Risk?”May 2024

“Antonio Guterres, UN Secretary-General, commented ‘we need an exit ramp off the highway to climate hell. The battle for 1.5 degrees will be won or lost in the 2020s.’ He was responding to an EU climate change monitoring service report that the average global temperature for the 12-month period ending May 2024 was the warmest such period since record keeping began in 1940.”

ReutersJune 6, 2024

Our Titanic Letter

The September 2023 Letter cited above reviewed the findings of separate 2023 studies by Carbon Tracker and by the University of Exeter on climate risk modeling. Both studies asserted there was a material gap between the scientific reality of potential high-impact physical, social, and economic events (e.g., rising sea levels, extreme weather, bio-diversity loss, resource scarcity, economic inequality, migration, conflict, mortality), and the much weaker, more subdued consequences suggested by the outdated long-term economic risk models still being used by the financial sector.