Why aren’t markets repricing rising climate risks? (Wellington)

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by Chris Goolgasian, CFA, CPA, CAIA, Director of Climate Research at Wellington Management

Mark Carney, Bank of England Governor and Former Chairman of the Financial Stability Board, once stated: “Past is not prologue, and the catastrophic norms of the future can be seen in the tail risks of today.” This notion is readily apparent in the context of climate change, where physical risks are rising with each passing year.

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Secular shifts in atmospheric conditions are increasing the risk of severe climate-related events. This trend, which shows no signs of mean reversion, is the basis of our ongoing research with Woodwell Climate Research Centeron the physical effects of climate change and their impact on capital markets. Our work with WHRC has found evidence that in many parts of the world, the probability of so-called hundred-year events, including devastating hurricanes, supernormal rainstorms, and inland floods, is rising. Despite this trend, policymakers, market participants, and the general public appear to be underestimating the risks, including the potential for negative market impacts.

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