What Do You Think About Climate Finance?

Johannes Stroebel is David S. Loeb Professor of Finance at NYU Stern School of Business, and Jeffrey Wurgler is Nomura Professor of Finance at NYU Stern School of Business. This post is based on their recent paper, forthcoming in the Journal of Financial Economics.

Scientists often describe climate change with superlatives. Urgent. Dire. Existential. The superlatives are all bad. Encouragingly, financial economists are devoting more and more attention to the intersection of climate and finance. Since time is short to define research agendas that help us manage the emerging financial and economic risks from climate change, we surveyed a number of finance experts and professionals to find the areas of agreement and coordinate on promising directions. Our full working paper, to be published in the November issue of the Journal of Financial Economics, may be found here.

Specifically, to reach academics, we collected 3,570 email addresses of professors of the top 100 finance departments. To reach practitioners, we used an email address list of 6,921 NYU Stern graduates working in finance. To reach those involved in policy, we identified 17 relevant public-sector institutions, such as the Federal Reserve Banks, the Bank of England, and the International Monetary Fund, and collected 955 emails of researchers or policymakers in their finance-related groups. Despite receiving only a single, unsolicited recruitment email with a link to our online survey, we received 861 complete responses—453 faculty, 294 practitioners, and 72 financial regulators—for a response rate of 7.5%, which compares well to the response rates typical of this sort of survey.

The first notable feature of the survey responses was the uniformity of opinion on a range of important topics. This commonality in responses extended across professional roles, geographic regions, degrees of concern about climate change, extent of professional interest in climate finance, and year of graduation.

Given the large sample size and consistency of responses across subgroups, the survey offer robust conclusions about respondents’ beliefs:

  1. Perhaps the most remarkable finding is the widespread belief that climate risk is currently being underappreciated by major asset markets. For example, those who think that stock prices reflect climate risks “not enough” outnumber those who believe that stock prices reflect climate risks “too much” by a factor of twenty to one! With respect to real estate, this factor is sixty-seven to one. With respect to insurance rates, this factor is twenty-one to one. Either the widespread belief that asset prices and insurance markets insufficiently price climate risk is way off, or asset markets have a lot catching up to do.
  2. There is a strong belief that the primary climate risk over the next five years involves regulatory activity along the transition path to a low-carbon economy. Such transition risks can include, for example, the risk to various businesses models in the energy and transportation sectors from increased regulation of carbon emissions. Over the next 30 years, however, almost all respondents judged physical risks as the most important—this risk captures the direct risks from rising sea levels, wildfires, and other physical changes to the planet as a result of climate change. One hopes the prediction is incorrect, of course, but it is the current belief among the academic and professional finance community. 
  3. The full sample of participants viewed carbon taxes and institutional investors as the two most important forces for change, with government subsidies and pressures from customers not far behind. Faculty and public-sector policymakers and economists are the strongest supporters of carbon pricing mechanisms, but private-sector respondents are more skeptical of such relatively hypothetical policies or mechanisms. They viewed institutional investors and customers, whose pressures they already face every day, as more important.
  4. Most respondents believe that future climate risks are relatively independent of future economic activity; the risks relevant to the finance community will proceed and develop whether economic growth is high or low.

We also gathered views on other subjects, such as the social discount rate for climate change mitigation projects and the most important research topics in climate finance going forward. We contrast the latter with actual research trends. Finally, we note the disagreements across subgroups on some questions, which are typically second-order and intuitive.

As with other aspects of climate change, the survey reveals significant consensus on many issues, but only time can tell which of these beliefs are fully justified.

The complete paper is available for download here.

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