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Rising Climate Change Risk Not Yet Factored in by Markets

Wind energy versus coal fired power plant
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Limited impact on near-term cash flows is masking longer‑term risk.

Key Insights

  • Climate change has seen a dramatic increase in attention in recent years, and this has been reflected in its prominence as an investment issue.

  • Despite this focus, however, only those sectors facing high transition risk, like fossil fuel producers, have seen valuations materially impacted.

  • In our view, rising climate change risk is not being reflected in broader valuations due to the limited impact of climate factors on near-term cash flows.

Last year we saw a dramatic increase in concern over climate change, which was reflected in its prominence as an investment issue. Despite all this attention, however, climate change has only had a significant impact on the valuations of select sectors— specifically those facing extremely elevated transition risk, such as fossil fuel producers. We believe valuation dislocations have been limited to a narrow universe of companies because climate change has not been particularly impactful to near‑term cash flows for the broader market.