Climate change and asset value

By Kim Sung-woo

Late last year, Netflix released the movie "Don't Look Up," which ranked second in popularity in less than 20 days from its release. The movie is about the global community delaying its response to a comet approaching the Earth, even telling people not to "look up" at the sky, which ultimately results in the devastation of the Earth.

Analogizing the climate crisis caused by lack of response to the comet crisis, the movie portrays how obsessed our society is with individual concerns now rather than shared concerns of the community later. It is alarming that climate change, which used to be such a popular topic for discussion until last year, is now losing people's attention due to other issues such as inflationary pressure coupled with energy prices and the geopolitical crisis from Russia.

For a moment, let's remind ourselves of the 26th Conference of the Parties to the United Nations Framework Convention on Climate Change (COP26) held last November. As a major outcome of negotiations among representatives from 197 countries, COP26 gave birth to the Glasgow Climate Pact and a consensus on detailed provisions of the Paris Agreement.

For the first time in COP history, fossil fuels were reflected in the agreement text, and a framework was set up for each country to transparently report the progress of their greenhouse gas emissions and reduction goals.

Nevertheless, the international community evaluated it as only a half success because, while there was a global consensus to take more proactive actions in restricting carbon emissions when the Paris Agreement was executed in 2015 (COP21), greenhouse gas emissions, in fact, increased in 2020 to 52 billion tons globally from 47 billion tons in 2015.

But, there was an important signal in COP26: a shift in occupations of COP26 participants. COP21 was dominated by chief government officials of the environment department of each country, climate scientists and activists, while COP26 saw a noticeable increase in the participation of the heads of treasury departments, CEOs and heads of financial institutions.

Janet Yellen, a participant at COP26, was the first U.S. treasury secretary to participate in COP, which evidences impacts of climate change on national finances. It is also worth paying attention to why many global CEOs took part in COP26, even though they did not even have a seat at the negotiation table. All of these phenomena point to the upcoming (or perhaps already happening) changes in actual asset value due to climate change.

Climate change will garner more attention if it can be connected to a shift in the value of privately owned assets, rather than a matter of shared assets such as glaciers. At the end of 2020, Morgan Stanley Capital International (MSCI) released its test results on the level of stress suffered by each industry due to climate change, which was calculated based on valuation of risks (e.g., costs of forced transitions to new businesses, natural disasters caused by climate change) and opportunities created for new businesses.

The test presumed the scenario where countries strive to keep the increase in the global average temperature under 1.5 degrees Celsius from pre-industrialization level, as agreed upon at COP21, and was based on European countries which have the strictest environmental regulations in the world.

According to the test results, the energy industry was expected to see a 67 percent plunge in value due to its susceptibility to climate change, while it is also expected to see an increase in value by more than 15 percent when it actively responds to environmental regulations. In case of the auto and parts industries, companies were expected to face a drop in value of less than 10 percent, but if they take strategic actions, their value will rise by more than 20 percent due to new business development triggered by expansion of the eco-friendly market.

This expectation has recently become a reality. Rivian, an electric pickup truck and electric van manufacturer listed last November, once had its market cap outpace that of a global automaker with a net profit of more than 10 trillion won last year. This happened even though Rivian had little sales. On the other hand, the value of energy-based assets put up for sale by global oil companies such as Royal Dutch Shell was found to be more than 160 trillion won.

Let's say I have a house (or a company). Recently, noise from upstairs (or say, a climate change) has been increasingly becoming an issue. While the situation may vary depending on the neighborhood (or in case of a company, the industry it belongs to), let's say housing prices, on average, tend to fall by more than 67 percent or rise by more than 20 percent depending on the noise level.

If that's the case, most of the homeowners would react immediately to the noise issue. While the current climate crisis response across global society looks similar to the comet crisis in "Don't Look Up," I believe we can look forward to a much more positive ending than the end of the world, because of the varying impact climate change will have on value of each of the privately owned assets.

Kim Sung-woo is head of the Environment & Energy Research Institute at Kim & Chang.