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Extreme heat making business and investors sweat

Wednesday 6 November 2019 9:43am

Extremely hot weather leads to declines in market value of shares on the stock market, according to a new international study.

The research involved researchers from Victoria University of Wellington, the University of Otago and the University of California, Davis.

“The study quantifies the impact of extreme heat events on corporate market values in public companies in the United States but has lessons for New Zealand,” say Associate Professor Lubberink from Victoria University of Wellington’s School of Accounting and Commercial Law.

Professor David Lont

Associate Professor Lubberink teamed up with Professor David Lont from the University of Otago Business School and Professor Paul Griffin from the University of California, Davis.

Professor Lont says the research suggests equity markets are recognising weather-related climate risks but are underestimating their financial impact.

The researchers used National Oceanic and Atmospheric Administration data on thousands of heat events – from what is considered “extreme” by local standards to weather disasters with a cost in excess of $US 1 billion – between 2003 and 2017. Then, by layering the timing and geography of these events with the main location of public companies’ operations, they were able to measure the equity markets’ response.

The researchers found equity markets experienced a 0.42 percent loss in the first 20 days of a heat wave, and more if it continued. Investor losses grew to 1.38 percent for more severe weather events and smaller firms were more vulnerable.

The most exposed firms lost 1 to 2 percent of their market value.

The researchers found a more negative response from investors in the most recent years of the study, as extreme weather events and climate change gained more media attention. “That suggests investors are increasingly incorporating an assessment of weather-related climate risk in pricing future equity returns, but that risk is still underpriced,” Professor Lont says.

“All things being equal, the risk to the industry from extreme weather events would be understood and priced accordingly but the drop in value after an event shows that is not the case. The investors are the likes of pension funds and insurance companies, so it’s pretty important that they understand the risk profile of the companies they are investing in.”

Associate Professor Lubberink says the research is particularly relevant to any companies exposed to extreme hot weather, such as wineries, agricultural businesses and power generators that rely on hydro-electric sources.

“Barring more drastic action to curb and disclose corporate emissions,” Professor Griffin says, “if asset prices continue to underprice extreme weather climate risk, this could have devastating future market consequences.”

The study, to be published in the December issue of Weather and Climate Extremes and available online now, is one of the first to examine and quantify the impact of extreme heat events on corporate market values.

The study also shows that this type of climate risk is local. Smaller firms were more vulnerable to losses from events in their region than were the big firms with operations in different localities.

“The study has implications for New Zealand and Australian firms and fund managers who need to manage this risk. However, the NZ Superfund, for example, does not disclose and quantify this specific risk in their latest annual report,” Associate Professor Lubberink says.

Professor Lont, a member of Ngāi Tahu, says the iwi’s climate change strategy briefly acknowledges some tribal areas will be impacted by extreme heat impacts. For example, Aoraki is projected to have 80 more hot days by the end of the century under the worst case scenario. “Our study provides a timely reminder that these risks need to be better disclosed, quantified and managed by boards of directors and investors,” Professor Lont concludes.

Read the study online in Weather and Climate Extremes

For more information, contact:

Professor David Lont
Department of Accountancy & Finance
University of Otago

Mark Hathaway
Senior Communications Adviser
Communications Office
University of Otago
Mob +64 21 279 5016