According to a University of Otago business expert, heatwaves can affect stock market pricing, with some companies losing up to 2% of their market value due to investor perceptions of climate risk.
This study was conducted in the year 2019. However, in accordance with the latest rise in global temperature, revisiting this study could be of help.
David Lont, professor of finance and accounting at the university, is a co-author of the study on the influence of exceptionally hot days on stock market activity. Researchers in New Zealand and California had used data from the National Oceanic and Atmospheric Administration to gauge market reaction to thousands of hot days between 2003 and 2017.
The findings, according to Lont, show that equity markets are aware of weather-related climate hazards but underestimate their financial significance. Risks are being taken, but the financial impact is being underestimated. The findings of the study were published in the journal Weather and Climate Extremes, which is available online.
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Lont while making a University statement said, “All things being equal, the risk to the industry from extreme weather events would be understood and priced accordingly but the drop in value after an event shows that is not the case.” He also said, “The investors are the likes of pension funds and insurance companies, so it’s pretty important that they understand the risk profile of the companies they are investing in.”
According to the study, equity markets lost 0.42 percent in the first 20 days of a heat wave, and more if it lasted longer. For more severe weather occurrences, investor losses increased to 1.38 percent, and smaller businesses were more exposed. The most vulnerable companies saw their market value plummet by 1 to 2%.
Investors’ negative reactions have risen in recent years, according to the report, as extreme weather and climate change that has led to an unexpected rise in global temperature resulting in heat waves received greater media attention in recent years.
Lead author of the study, Paul Griffin from the University of California said, “Our finding of physical climate risk under-pricing has important implications for the design of low carbon risk portfolios by managers of investment funds, especially funds devoted to public and private pension plans. Some fund managers already assume climate risk under-pricing. Our study confirms this.”
Taking notes from this 2019 study, one could infer that stock prices do get affected by heat waves.
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