Regime Shifts, Rule-Based Frameworks and the Humbling of the Markets
QMA’s Lorne Johnson joins Investment Magazine’s “Market Narratives” podcast to discuss US stock-bond correlation regimes, policy uncertainty, and more.
Shehriyar Antia, Head of Thematic Research at PGIM, joined AusBiz TV to discuss the firm’s latest Megatrends research, Weathering Climate Change. During the discussion, Antia explored insights from the new research and shared that while a data revolution is underway for climate analytics, markets are not yet pricing in climate risk.
>> Our next guest says despite all the noise around climate change, markets are not priced in the risk of climate change. And to take us through it is Shehriyar Antia, head of Thematic Research at PGIM, and joins us from New York. Great to talk to you.
>> Good morning, Andrew. And thank you very much for having me.
>> You're terrific you can, can speak to us. So all right. This is perhaps come, comes as a bit of a surprise in that you feel as though markets and companies are not prepared for climate change. There has been so much talk about it of course. So what's the underlying issue here you're looking at.
>> Absolutely. So, you know, Andrew, it's, it's, it's pretty clear that markets don't do a great job at pricing and climate change right now but what's critical for, for investors here is that going forward, markets will price in climate change much more fully. There are a number of catalysts working to drive markets today to price in climate change more completely and more consistently. So I'm talking about the, the collective nudges from government, regulators, consumers, investors, to internalize more of these climate externalities. There's also extreme weather events be they bush fires in Australia, extreme cold spells in Texas that raise the collective perception of climate change reaching a tipping point. There's also the potential for greater corporate climate liability but probably the main catalyst here, the one that we're watching most closely is the data revolution that has been underway in climate analytics over the last five, five years or so.
>> So what needs to change then to make sure that we have the right data to make informed decisions?
>> Well, you know, there, there are, there are new climate analytics that are, that are actually more accessible to, to investors. These new analytics are more granular. Of course, I don't want to overstate this, climate data is far from perfect. There's plenty of room for, for improvement but the, but the, but the alternative data space is really booming. I'm talking about things like satellite imagery, heat and water stress metrics, geolocation services. What's, what's really, what's really critical here is the new capability for investors and that is that this data revolution and this new data really enables investors to be much more granular in their analysis and to differentiate within regions and sectors where sometimes markets don't. And that, and that, of course, is, is where, where the, where the opportunities lie, right.
>> I'm interested too. I mean, you're saying, I notice in your note that countries with similar credit ratings and yields exhibit wide variations in climate change, vulnerability, and resilience. And I guess we can take a look at Australia as a point in there. Are you seeing policy risk as an issue going forward?
>> Well, you know, so what, you know, looking at sovereign, sovereign debt, right, you know, using, using, using climate data, investors can, can reveal some, some, some relative value. So like nearly 25% of investors view climate as a risk for sovereign debt but only 4% view it as an opportunity. Let's, let's, let's take for, for example, Russia and India. They both have a similar credit rating, they both trade at roughly the same yields, yet, India on the one hand has a much higher vulnerability to, to climate change. So climate-savvy data-driven sovereign investors can actually earn the same yield but with a more climate-resilient profile. Now, you know, once again, I don't, I don't want to over, oversimplify this climate, climate vulnerability is certainly not the only consideration for sovereign debt investors but I think that this is a useful, a useful illustration of how some of this data can actually help investors find some opportunities here.
>> Hey, what about that startup space in that venture capital, how does that area fit in with this investment opportunity?
>> Sure. So, you know, transformative early-stage technology such as hydrogen-powered cells offer the potential to decarbonize the most carbon-intensive industries, the dirtiest industries if you, if you will like air travel and steel making. Another example of a transformative early-stage technology is carbon capture and storage. And what it does is it essentially plucks carbon out of the air and buries it underground or under the sea. And, you know, when done at scale efficiently, this has the potential to actually reduce the level of carbon that's floating around in the atmosphere. So there's real potential here for some game-changing technological transformations. Though, to be clear, neither of these are really close to being useful at scale but, you know, these are early days but investors can certainly support their development. And the way to play these technologies is probably through private equity, maybe some venture capital firms.
>> And, Shehriyar, almost out of time but just briefly, what effect has the pandemic had? Has it sort of delayed those development invest -- of investment opportunities or is it actually been beneficial?
>> So, you know, what the pandemic has done really has, it is sort of shed a new, a new light on the importance of really, you know, several nonfinancial factors of which climate is one of them. So I don't think that it's really altered many of these opportunities but it certainly has sort of brought them to the [inaudible] for sure.
>> All right. Terrific to get your view there from New York. Thanks very much for joining us from PGIM.
>> Thank you very much.