New analysis by Kempen Capital Management has modelled the impact of shock increase in carbon prices globally, implemented through either a carbon tax or emissions trading scheme (ETS) with potential devaluations of a fifth.

As reported by our sister publication, Better Society, global carbon price shock of US $75 on polluting companies could cause a 4-20 per cent fall in global equity valuations; ranging from 4 per cent in the case of Scope 1 and 2 emissions, and 20 per cent in case of Scope 1, 2 and 3 emissions.

The asset and fiduciary manager believes that higher carbon prices and the scope of emissions coverage are not yet priced into markets and this could create opportunities for investors allocating to the transition economy.

The research suggests a price rise of US $75 per tonne of CO2 on polluting companies’ Scope 1 and 2 emissions could knock an average of around 4 per cent the value of global equities. If the tax were applied to polluters’ scope 1, 2 and 3 emissions the hit to equities could average 20 per cent.

Furthermore, with the accelerating pace of global warming it is likely that a US $75 rise in the global average carbon price might not be sufficient to meet the Paris targets.

A secondary analysis of an increase of US $150 on polluting companies’ scope 1 and 2 emissions could knock an average of 9 per cent off global equities. If the tax were applied to polluters’ scope 1, 2 and 3 emissions, the hit to equities could average a drop of 41 per cent.

Kempen Capital Management Investment Strategy Advisory MD, Michel Iglesias del Sol, said: “There is growing evidence that ESG-aware strategies have lower risk and potentially higher returns.

"An investor such as a DB or DC pension fund with a time horizon longer than ten years is likely to be impacted by climate transitional risks, and investors with longer term horizons are likely to face both transitional and physical risks if low carbon thinking is not built into equity portfolios.”

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