Markus Müller, Deutsche Bank’s ESG Chief Investment Officer, has recently issued a warning to investors about the looming risk of sudden devaluation due to climate change. In a client note released this week, Müller pointed out the potential for unexpected “fat-tail” risks that could lead to catastrophic outcomes, challenging the prevalent assumption of a gradual impact from global warming.
Highlighting impending tipping points that could trigger severe physical consequences linked to climate change, Müller’s warning aligns with concerns voiced by analysts at Jefferies. They too have expressed worries about investors not leveraging up-to-date climate models for risk assessment.
Drawing parallels with the 2008 market meltdown, Müller defined four categories of climate-related risks: physical, transition (involving changing regulations, technologies, and consumer preferences), liability, and contagion. He forecasted transition risks to manifest in the short term, with physical risks likely appearing in the medium term.
The implementation of climate risk disclosure rules in regions such as the European Union and California has made potential losses increasingly apparent to investors. Concurrently, The Securities and Exchange Commission is in the process of developing similar regulations for all US firms.
Müller underscored the growing importance of environmental, social, and governance metrics in portfolio construction. He also indicated that if governments fail to implement adequate measures to address these risks, central banks might have to tighten policy rates. This move could have a significant impact on bonds and equity valuations.
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