The Case for Forceful Stewardship (Part 1): The Financial Risk from Global Warming

Covington, Howard E.; Thamotheram, Raj

doi:10.2139/ssrn.2551478

Cited by 12 publications

(4 citation statements)

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“…17,18 As corporate earnings ultimately accrue to the owners of the financial liabilities of the corporate sector in one form or another, the (undiscounted) cash flow from a globally diversified portfolio of stocks should also grow at roughly the same rate as the economy. 16 Third, assuming debt and equity are perfect substitutes as stores of value, which is consistent with the neoclassical model of economic growth underpinning those aggregated IAMs that represent it explicitly, the same relationship will govern the cash flow from bonds, the other principal type of financial asset. According to the Modigliani-Miller Theorem of corporate finance, under certain assumptions, any future changes in capital structure will not change the expected value of today's aggregate portfolio.…”

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confidence: 61%

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‘Climate value at risk’ of global financial assets

et al. 2016

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Investors and financial regulators are increasingly aware of climate-change risks. So far, most of the attention has fallen on whether controls on carbon emissions will strand the assets of fossilfuel companies. 1,2 However, it is no less important to ask, what might be the impact of climate change itself on asset values? Here we show how a leading Integrated Assessment Model can be used to estimate the impact of 21 st century climate change on the present market value of global financial assets. We find that the expected 'climate value at risk' (climate VaR) of global financial assets today is 1.8% along a business-as-usual emissions path. Taking a representative estimate of global financial assets, this amounts to $2.5 trillion. However, much of the risk is in the tail. For example, the 99 th percentile climate VaR is 16.9%, or $24.2 trillion. These estimates would constitute a substantial write-down in the fundamental value of financial assets. Cutting emissions to limit warming to no more than 2°C reduces the climate VaR by an expected 0.6 percentage points, and the 99 th percentile reduction is 7.7 percentage points. Including mitigation costs, the present value of global financial assets is an expected 0.2% higher when warming is limited to no more than 2°C, compared with business as usual. The 99 th percentile is 9.1% higher. Limiting warming to no more than 2°C makes financial sense to risk-neutral investors -and even more so to the risk averse.The impact of climate change on the financial sector has been little researched to date, with the exception of some kinds of insurance. 3 Yet, if the economic impacts of climate change are as large as some studies have suggested, 4-6 then, since financial assets are ultimately backed by economic activities, it follows that the impact of climate change on financial assets could also be significant.The value of a financial asset derives from its owner's contractual claim on income such as a bond or share/stock. It is created by an economic agent raising a liability that will ultimately be paid off from a flow of output of goods and services. For example, a firm pays its shareholders' dividends out of its production earnings, and a household usually pays its mortgage from its wages. Output is the result of a production process, which combines knowledge, labour, intermediate inputs and non-financial or capital assets. Therefore there are two principal ways in which climate change can affect the value of financial assets. First, it can directly destroy or accelerate the depreciation of capital assets, for example through its connection with extreme weather events. 7 Second, it can change (usually reduce) the outputs achievable with given inputs, which amounts to a change in the return on capital assets, in the productivity of knowledge, 8 and/or in labour productivity and hence wages. 9 Why is it important to know the impact of climate change on asset values? Institutional investors, notably pension funds, have been in the vanguard of work in this area: 10 for them...

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confidence: 61%

“…Second, corporate earnings account for a roughly constant share of GDP in the long run, 16 so those earnings should grow at roughly the same rate as the economy. This is related to Kaldor's famous 'stylised fact' that the shares of national income received by labour and capital are roughly constant over long periods of time.…”

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confidence: 99%

‘Climate value at risk’ of global financial assets

et al. 2016

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“…Extreme climate events destroy fixed assets and financial assets (Covington & Thamotheram, 2015; Fuss, 2016), accelerate capital depreciation (Fankhauser & Tol, 2005), and lower labor productivity (Fankhauser & Tol, 2005; Hasegawa et al, 2016); therefore, climate risk has a negative impact on a firm's operation and performance. In response to poor performance under climate risk, a firm might try to improve its accounting performance, which inevitably changes its tax position.…”

Section: Related Literature and Hypothesis Developmentmentioning

confidence: 99%

Climate risk and corporate tax avoidance: International evidence

Chen

et al. 2021

Corporate Governance

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Research Question/Issue This study investigates the relationship between climate risk and corporate tax avoidance. Previous studies on this relationship generate mixed results, theoretically and empirically. Our study addresses this empirical question by providing new evidence using a large international sample and a novel proxy for climate risk. Research Findings/Insights The empirical results show that higher climate risk is associated with higher tax avoidance. Mechanism analyses show that this positive association is due to the incentive to reserve cash in response to tightened financial constraints, rather than tax deductions granted by governments. This result is more pronounced in countries or regions that have poorer corporate governance and information environments, lower economic development, and a more uncertain policy environment. Theoretical/Academic Implications Our evidence highlights the importance of considering the role of climate risk in corporate tax policies and of comparing the link between climate risk and tax avoidance across countries. Practitioner/Policy Implications Echoing environmental non‐governmental organizations' (NGOs) recent call on governments to strengthen tax administration, our study has policy implications that emphasize the necessity for policymakers to consider the link between climate risk and tax avoidance.

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“…While multiple domestic policies including carbon taxation (Metcalf & Notes, 2008;Covington & Thamotheram, 2015) and investment into sustainable energy (Wade & Jennings, 2016) have been suggested to limit anthropogenic GHG-emissions that significantly influence climate change, more global policies such as international environmental agreements should also be proposed given the disproportionate impact developed-country emissions have had on the developing world (Schelling, 2000). The United Nations Framework Convention on Climate Change established the Paris Agreement (2015) obliging both developed and developing countries to reduce emissions in high-emission industries to reduce emissions.…”

Section: Policy Implicationsmentioning

confidence: 99%

The Macroeconomic Implications of Climate Change on Sub-Saharan Africa: A Case for Sustainable Development

Sandalli

2021

Review of Business and Economics Studies

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While climate change has harsh universal impacts, it is believed that its negative effects fall disproportionately on hotter, developing regions. This paper examines these claims using a panel datasets for 84 OECD and Sub- Saharan African countries between 1970–2018. I document both the evolution of country-specific temperatures and the long-term economic impact of temperature and precipitation variations on GDP per-capita. Using a panel auto-regressive distributed lag model on the sample mentioned above, I found that temperatures have unanimously increased for all sample-countries and that variations in temperature above historical norms significantly reduced income-growth. No significant relationship was found between precipitation and income growth. When interacting ‘poor’ and ‘hot’ country variables, I found that temperature variations disproportionately affected both hotter and poorer Sub-Saharan African countries. In OECD countries, temperatures have increased more quickly relative to their historical norms than Sub-Saharan African countries. Finally, while poorer and developing countries are more adversely affected by temperature variations, they seem to recover more quickly from temperature shocks than sample averages. I explain these results and link them to potential policy implications regarding global sustainable development and greenhouse gas abatement.

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The Case for Forceful Stewardship (Part 1): The Financial Risk from Global Warming

Cited by 12 publications

References 13 publications

‘Climate value at risk’ of global financial assets

‘Climate value at risk’ of global financial assets

Climate risk and corporate tax avoidance: International evidence

The Macroeconomic Implications of Climate Change on Sub-Saharan Africa: A Case for Sustainable Development

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