According to a PGIM survey of global CIOs, more than 40% do not currently incorporate climate change into their investment process. Availability of reliable modeling around the market impact of climate was the most cited hurdle. Fortunately, climate analytics and modeling are finally emerging from academic articles and becoming more accessible for investors. Indeed, the last few years have seen the beginning of what could be called a “data revolution” around climate analytics. While still in its early stages, this trend allows investors to better quantify climate risk and differentiate between firms within an industry, despite the limited quality and consistency of climate data today. This kind of relative valuation tends to lead to a gradual repricing of assets.

Europe’s emissions trading system (ETS) led to a significant repricing of European utilities. Clearly, this type of government action can play a key role in altering the economics of carbon-intensive assets. Such changes in policy and regulatory regimes can be catalysts for a broader market repricing. As more jurisdictions adopt comparable policy initiatives, a more complete repricing of transition risk is likely to occur globally.

Changes in the preferences of investors and consumers can also catalyze repricing of climate risk. In the case of investors, more than $40 trillion is currently invested in ESG strategies globally.³ While not all of that is geared towards the “E” component, it is nevertheless telling that some investors already consider climate-related risks and carbon emissions to be material and relevant for them. In order to compete for capital, firms must respond to changing investors’ preferences or risk relying on a shrinking pool of potential investors and facing a higher cost of capital.

Another potential avenue for the repricing of carbon-based assets is through the courts. To date, no legal challenges against carbon-emitting companies have succeeded in their attempts to seek damages for harm done to the climate – but this field is still evolving. Of the roughly 1,500 climate cases filed, the vast majority were in the last decade.⁴ And with new lines of attack constantly being explored, it’s plausible that at some point one of them will succeed.