The Unstoppable Rise of Sustainable Investing

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Investing in the Era of Climate Change

We live in an era of the unprecedented and rapid warming of the global environment due to human activities. So far, global temperatures have already risen by 1.1 degrees Celsius above pre-industrial levels, and the world has also witnessed a rise in the number of extreme weather and climate events, particularly in 2022 which was dominated by headlines of heat waves in Europe, flooding in Australia and drought in China.

This fight against climate change will require firms and governments alike to commit unparalleled levels of financial resources and investment, but at the same time, a transition to a green economy can unlock future economic opportunities and jobs. For instance, sustainable investing is becoming increasingly popular as more and more people have come to realise the importance of a low-carbon economy. A recent report estimated that total ESG-related assets under management (AuM) will rise to US$33.9 trillion by 2026, from US$18.4 trillion in 2021.

#CUHKWhitePaperSeries | The Unstoppable Rise of Sustainable Investing

Given that climate change is widely expected to become increasingly important to investors, in this CUHK Business School Research White Paper, we shall seek to examine how institutional and retail investors perceive the risks and opportunities associated with climate change and how they will react in response.

For example, with extreme weather becoming more frequent, people are becoming better aware of the seriousness of climate change after personally experiencing it. Can this translate into different performances on the stock market for companies depending on their carbon footprint?

Within the market, institutional investors are a segment whose decisions can have a great impact on the overall sentiment. How will these large-scale investors react to global warming? And while some investors adjust their investment decisions in response to climate change, companies also face mounting pressure to become more environmentally friendly. Can climate risks really affect the valuation of a firm on the stock market, and how does this translate into its business decisions on the operational level?

Finally, previous studies have shown that climate change does affect the portfolio choices of institutional investors, but there is little information about its impact on the retail side. If companies with high carbon emissions come under pressure from investors, what happens to their employees? Do families working for high-emission industries face additional risk to their income streams and would they change their investment behaviours as a result?

We shall seek to answer these questions in the following sections of this white paper.

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