Climate Change Raises Wall Street Alarms: UT-Austin Study

AUSTIN, TX — According to a newly released study produced in part by the University of Texas at Austin business school, climate change is being felt in a corner of the world different from where one might expect: Wall Street. And some of the biggest investors are starting to take action, researchers found.

The findings are contained in a first-ever survey of institutional investors conducted in part by the McCombs School of Business at The University of Texas at Austin. From banks and insurers to pension and mutual funds, 97 percent of 439 respondents believe global temperatures are rising. In addition, more than half say climate risks are already a factor in their investment decisions, according to “The Importance of Climate Risks for Institutional Investors” published in the March 2020 issue of The Review of Financial Studies.

“These investors have accepted that climate change is happening,” Laura Starks, finance professor at Texas McCombs — who designed the survey with colleagues Philipp Krüger of the University of Geneva and Zacharias Sautner of the Frankfurt School of Finance & Management — said in a prepared statement. “They’re trying to come to terms with how it’s going to affect the risk and return of their portfolios.”

The survey also reveals how institutions are starting to act. Such tactics range from asking companies to catalog carbon emissions to backing shareholder resolutions, researchers found. If institutions are not satisfied with executives’ responses, the study found, a few are divesting their shares.

Such measures are only the beginning, the survey suggests. Within five years, fully 91 percent expect climate risks to be financially material to their investments.

Of executives who filled out the survey, 31 percent were C-level. Forty-eight percent of the 439 respondents managed more than $100 billion in assets. Institutions’ responses paint a mixed picture of how important they consider climate risks. Only 10 percent rank climate change as being among a top concern, compared with standard financial and operating risks. But three kinds of climate risks are rapidly rising in urgency:

• The risk of new regulations is already having financial consequences for 55 percent of respondents.
• Within two years, 66 percent fear physical impacts on their assets from extreme weather, rising sea levels or wildfires.
• Within five years, 78 percent expect technological effects, as greener technologies unseat carbon-burning ones.

“The Paris accord means that different countries are going to have to start regulating carbon emissions more,” Starks said. “The industry, as a whole, is just in the early stages of tackling this issue.”

Many respondents identified a first step in assessing the problem as a way of shielding themselves. Of those, 38 percent are analyzing the carbon footprints of the securities they own, while 24 percent consider climate risks when screening new investments.

The next step is to talk with corporate managers. While 43 percent of institutional investors have discussed climate risks in general, the study found, 32 percent have proposed specific actions to shrink carbon footprints.

Some respondents reported how they're not always happy with companies' responses, according to the findings. For example, 30 percent have submitted shareholder proposals such as a successful 2017 resolution that asked Exxon Mobil to disclose how climate risks would affect the company in the future, according to the report.

The study also found a fifth have taken more drastic steps such as publicly criticizing management, taking legal action, or — seen as the ultimate punishment — selling off shares.

But for most, it’s enough to put executives on notice. “A company becomes more aware of what’s in their carbon footprint, because someone is watching,” Starks said.

For more details about this research, read the McCombs Big Ideas feature story.