Adapting to Changing Investor Sentiment

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Climate change is becoming an increasingly significant aspect of our daily lives, and this is something that is being felt not only in our physical environment, but also in financial markets. This may also hold true in the opposite direction, as how investors behave can also affect the fight against global warming. In this white paper, we have explored climate finance from different angles to find out how households and institutions are adapting their investing behaviours as the level of awareness of climate change has risen in recent years.

We firstly found that during abnormally warm weather, retail investors become more aware of climate change and sell stocks belonging to high-emission industries. This suggests that it is only by appealing to the personal and salient experiences of individuals that the challenge of climate change can be most effectively tackled. We also found that institutional investors tend to gradually reduce their carbon exposure as the world becomes increasingly aware of the effects of global warming.

We took a look at the gap in stock market valuation that can exist between companies that are classified as high- or low-emission. We found that public firms that are heavily polluting tend to reduce their carbon footprint and ramp up their investments in innovative activities that allow them to become more environmentally friendly when their stock price comes under presence as a result of the general rise in awareness of the effects of climate change.

Sustainable investing is becoming mainstream in the investment world.

Finally, we investigated the investment behaviour of households employed by companies in high-emission industries. We found these households tend to reduce their level of risk-taking behaviour due to concerns over their own income stream. Moreover, we found households employed in high-emission industries tend to be less wealthy, younger, and less well-educated. The implication is that climate regulations may reinforce wealth inequality by making less wealthy households less likely to take financial risk, in turn making it harder for them to accumulate wealth. Policymakers should thus seek to implement climate regulations that do not increase income risks for households employed in industries most affected by climate change regulations.

Sustainable investing is becoming mainstream in the investment world. Companies, regardless of their carbon footprint, need to understand its effects on their financial as well as operational well-being, as investor behaviour continues to evolve in the current era of heightened environmental awareness. In the future, we will continue to study the impact of climate change on investment and on the evolution of people’s perceptions about climate risks as it relates to financial markets. We also look forward to continuing to explore how finance as a discipline can help to contribute to combating climate change.

To find out more about a specific topic, click on the links below to navigate to the relevant chapter:

INTRODUCTION – The Unstoppable Rise of Sustainable Investing

PART I – Does Climate Change Sway Markets?

PART II – The Power of Institutional Investors

PART III – Pollution and its Institutional Investor Discount

PART IV – Does Regulatory Risk Affect Retail Investment Decisions?

CONCLUSION – Adapting to Changing Investor Sentiment