Moody’s Catches on to Climate Risk Mispricing

The acquisition of California-based Four Twenty Seven, Inc., by Moody’s Corporation could signify the beginning of a major shift in how markets price risks related to climate change. Up until now, these risks largely have been absent from investors’ models, but if Moody’s, a major rating agency, starts using Four Twenty Seven’s methods in assigning ratings, that might quickly change.

For a June, 2019 working paper, Zacharias Sautner of the Frankfurt School of Finance and Management and his collaborators Philipp Krueger and Laura Starks surveyed institutional investors on their climate risk perceptions. They found that while most investors aren’t climate change deniers, they tend to see the associated risks of their portfolios as reputational and ethical in nature rather than physical or financial. In other words, public disapproval and the possibility of government intervention are seen as more significant factors than the direct effect of climate change on businesses’ sales and profits. Only 26% of those asked incorporate climate risks into their valuation models and 25% hedge against them.