Carbon Shock Analysis: a $100 increase in carbon prices potentially causes a 30% fall in global equity price
Amsterdam/’s-Hertogenbosch, the Netherlands, 1 December 2022
Van Lanschot Kempen seeks out opportunities to reduce carbon risk in clients’ portfolios and to invest in the transition to a sustainable economy
- The sensitivity of equity markets to carbon pricing risk has increased over the past 12 months due to rising energy prices and geopolitical tensions, according to Van Lanschot Kempen’s annual Carbon Shock Analysis.
- Van Lanschot Kempen’s base case scenario of a $100 global carbon price increase on polluting companies shows a potential 6%-30% fall in global equity valuations - ranging from 6% in the case of Scope 1 and 2 emissions and up to 30% for Scope 1, 2 and 3 emissions1.
- A $150 global carbon price increase on polluting companies could cause an even greater fall in global equity valuations - ranging from 9% in the case of Scope 1 and 2 emissions and up to 43% for Scope 1, 2 and 3 emissions. Van Lanschot Kempen believes this increase is necessary in developed countries to achieve the Paris climate goals.
- The analysis shows that the impact of higher carbon prices and the scope of emissions coverage is not fully priced into markets – creating opportunities for investors who are allocating to the transition economy.
- Applying an appropriate sustainable benchmark for a global equity portfolio could lower the carbon-transition price risk by 70-80% for global equities and by 90% for European equities.
The sensitivity of equity markets to carbon pricing risk has increased over the past 12 months due to rising energy prices and geopolitical tensions. Van Lanschot Kempen has updated its model on the impact of a shock increase in carbon prices globally - implemented through a carbon tax or through emissions trading scheme (ETS). The analysis focuses on how responses to climate change can be integrated into investment analysis in order to protect and enhance the portfolios of long-term investors.
Van Lanschot Kempen’s analysis models a worst-case scenario but expects the impact to be spread over a number of years.
Maarten Edixhoven, Chair of the Management Board of Van Lanschot Kempen, said. “The current energy crisis has raised concerns that meeting global climate goals has become less urgent. However, nature is telling us that it is still a high priority by the number of huge environmental impacts we are seeing. We think the focus on reducing carbon emissions will – and should - only get stronger in the medium term.
“As an entrepreneurial wealth manager with a strong focus on sustainability we aim to act as a guide to our clients in the current climate and energy transition. Reducing the carbon-transition risk in clients’ portfolios is essential in this respect. Also, we are seeking out opportunities to invest in the transition to a sustainable economy, in both investment and non-investment related services to our clients. We’ve reallocated to lower carbon or climate transition tilted assets and we’re investing in green technologies in both private and public markets.”
Current carbon price must rise to meet Paris objectives and geopolitical energy security risks
The war in Ukraine and Europe’s urgent need to reduce reliance on Russian gas imports have accelerated the need to provide affordable financing for green energy solutions. At COP27, the IMF called for a $75/ton carbon price2, but several institutions, such as the Intergovernmental Panel on Climate Change (IPCC) and the Network for Greening the Financial System (NGFS), now estimate that a carbon price of more than $100 would be required to achieve the Paris Climate Agreement3. According to the World Bank, just 23% of global greenhouse gas emissions are covered by a carbon pricing mechanism4. The IMF estimates that the global average carbon emission price is currently no more than $5 (per tCO2e)5.
Also, the need for energy independence - which mirrors the broader trend of deglobalisation - increases the likelihood of carbon emission prices increasing rapidly in the coming years and being applied to a greater number of high emitting companies.
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About Van Lanschot Kempen
Van Lanschot Kempen, a wealth manager active in Private Banking, Professional Solutions, Investment Management and Investment Banking, with the aim of preserving and creating wealth, in a sustainable way, for both its clients and the society of which it is part. As a sustainable wealth manager with a long-term focus, Van Lanschot Kempen proactively seeks to prevent negative impact for all stakeholders and to create positive long-term financial and non-financial value. Listed at Euronext Amsterdam, Van Lanschot Kempen is the Netherlands’ oldest independent financial services company, with a history dating back to 1737. To fully leverage the potential of the Van Lanschot Kempen organisation for its clients, it provides solutions that build on the knowledge and expertise across its entire group and on its open architecture platform. Van Lanschot Kempen is convinced that it is able to meet the needs of its clients in a sustainable way by offering them access to the full range of its products and services across all its businesses.
For more information, please visit vanlanschotkempen.com
This press release does not constitute an offer or solicitation for the sale, purchase or acquisition in any other way or subscription to any financial instrument and is not a recommendation to perform or refrain from performing any action.
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