The COVID-19 pandemic underscores why market regulators, companies and investors should do a better job planning for climate risks to the financial system, a pair of new reports find.
Driving the news: The International Monetary Fund said projected increases in the frequency and severity of natural disasters are a potential threat that investors probably aren't weighing enough.
- Separately, the investor advocacy group Ceres has a new report that recommends steps that the Federal Reserve, banking, commodity and securities regulators should take to address "systemic risk" of global warming.
Why it matters: "While projections of climatic variables and their economic impact are subject to a high degree of uncertainty, aggregate equity valuations as of 2019 do not appear to reflect the predicted changes in physical risk under various climate change scenarios," IMF said in the latest analysis published in its wider "Global Financial Stability Report."
- Meanwhile, the Ceres report could help provide a roadmap for regulators under a Joe Biden presidency, which would shift the partisan balance in independent regulatory agencies.
The intrigue: The IMF authors, in a blog post, say the COVID-19 crisis is a reminder that "crisis preparedness and resilience are essential to manage risks from highly uncertain events that can have extreme economic and human costs."
- The Ceres report similarly cites COVID-19 in its warning of the potential for "unaddressed risks to massively disrupt both Wall Street and Main Street."
- It also warns that "mispricing" climate risks adds further jeopardy to financial systems already vulnerable from the pandemic.
What they found: The IMF analysis finds that with some big exceptions — such as catastrophic 2011 flooding in Thailand that sent markets there reeling — large disasters have historically had a pretty minor effect on equity markets.
- But they see trouble signs going forward, given estimates of more heatwaves, precipitation and more.
- They compared very recent (2019) equity valuations in both advanced economies and emerging markets to growing climate-related risks.
The bottom line: "Looking retrospectively to 2019 equity valuations across countries, our study finds that they did not reflect any of the commonly discussed global warming scenarios and associated projected changes in hazard occurrence or incidence of physical risk," the summary notes.
- "This apparent lack of attention could be a significant source of market risk looking forward."
What's next: The IMF report's recommendations include mandatory corporate disclosures on climate risks that would help banks, insurers and investors better grasp them.