The Ukraine war raises the likelihood of rising carbon prices

According to Van Lanschot Kempen research, the sensitivity of equity markets to carbon price risk has increased over the last year as a result of the Russia-Ukraine war.

According to the Dutch investment manager's base scenario, a $100 increase in worldwide carbon pricing paid by polluting industries would result in a 6%-30% drop in global market valuations.

This varied from 6% for Scope 1 and 2 emissions to 30% for Scope 1, 2, and 3 emissions. Scope 1 and 2 emissions are those over which firms have more control, but scope 3 emissions are typically found in their supply networks.

A $150 worldwide carbon price rise on polluting corporations might result in an even bigger drop in global market prices, ranging from 9% for Scope 1 and 2 emissions to 43% for Scope 1, 2 and 3 emissions.

According to Van Lanschot Kempen, the rise is required within developed countries to meet the Paris climate targets.

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.“

Nature, on the other hand, is telling us that it is still a high priority, based on the amount of massive environmental repercussions we are witnessing. We believe that the emphasis on lowering carbon emissions will - and should - intensify in the medium term."

According to the report, the impact of rising carbon pricing and the breadth of emissions covering are not completely priced into markets. This has provided chances for investors who are putting their money into the transition economy.

According to the Dutch firm's chief investment strategist, Michel Iglesias del Sol, long-term asset owners should “reposition equity portfolios to make them more robust to deal with changes in carbon pricing and regulation".

He added: “This could mean reallocating away from standard indices, or tracking alternative sustainable benchmarks. As the analysis suggests, an ESG leader or transition pathway index will be better protected against the risks of higher carbon tax.”

According to the analysis, clean energy, clean water, food supply, and sustainable farming are critical long-term allocations that should benefit from the climate transition and decrease physical climate threats.

By fLEXI tEAM