Published on 28 January 2020

SUSTAINABLE FINANCE

Australia is burning and the stock market are surging: does the climate not have a price?

The gap is widening between stock markets indices and the real world.  This is striking in the case of Australia and France. In the first case, Australia is on the verge of going up in flames while the national stock exchange breaks records. In France, the longest social crisis in history has not prevented the CAC 40 from reaching nearly 6000 points.

Incendie australie
Massive fires have ravaged Australia for several weeks.
@slovegrove

The CAC 40 had a year-end value reaching nearly 6,000 points compared to 4,730 at the end of 2018.  The ASX 200, Australia’s flagship index, saw the same results.  It closed at 6,684 points, which is 1,000 points more than its year-end value in 2018. These records would make one think that everything is going well, at least on planet finance. On planet Earth, however, things are much more complicated! France is at a stand-still due to transport strikes, and Australia is burning.

The fires in Australia further intensify greenhouse gas emissions and lead us straight towards a higher rate of global warming than the Paris Agreement anticipated. The fires are ravaging a country that actually contributed to blocking the climate agreement at COP 25 in December.  These environmental and social crises do not seem to have an impact on the stock markets of the countries impacted by these disasters, despite the ever-present sword of Damocles.

In 2015, the financial sector adopted climate policies after being persuaded that climate change was a systematic risk to global financial stability.  Currently, the indices that select the largest global corporations for inclusion appear to have an overflow of “stranded assets”, or devalued assets, because they are incompatible with the Paris Agreement: fossil fuels, petrol cars, overproduction of textiles, etc. Four years later, stock market records would make one think that such as risk is no longer relevant. Total is still the third highest market capitalization for CAC 40, behind LVMH and L’Oréal. As for ASX 200, it holds numerous mining and oil stocks, as well as a major airline. 

Indices at +4°C

Their impressive gains are a bit of a smokescreen that sanctifies index management and endorses the decorrelation between stock market mechanisms and the economic fundamentals of the companies that make them up! The growing importance of this management method disrupts the ability of stock market variations to reflect the real value of listed companies, especially on an environmental and social level. Index management mechanically inflates each index and attracts ever-increasing volumes of assets without the investor taking an active role in choosing a given company.

Thus, individuals blindly invest in a world based on core economic values of financial scope. From a climatic point of view, however, this tends to make the situation worse. The few studies on the subject estimate that the major benchmark indices are on trajectories towards a global warming of 3°C to 4°C.

The success of Vanguard and BlackRock

The High-Level Expert Group on Sustainable Finance (HLEG), created by the European Commission in 2017, hoped that these indices would calculate and publish their "climate temperature" impact. This would have made it possible to link their stock volumes with the level of global warming being funded: 2°, 3°, 4°C, or even more. But their proposal was not accepted.

The increase in stock volumes first benefits indexing giants like Vanguard and Blackrock, which grew from $4.721 trillion in assets during the summer of 2015 to nearly $7 trillion in assets at the end of 2019. The sheer magnitude of these index managers makes them the shareholders of reference for the largest companies on the planet, and the ideal players to push companies into adopting a low carbon model. But again, the climate is not the priority. The American NGO Majority Action analyzed the index managers’ voting policies and revealed that they rarely voted in favor of the climate.

To conclude, the fight against climate change involves renewing the link between stock market variations and economic and political realities. In Australia as in France, it is worrying that the deep crises experienced by these countries do not impact their own stock markets. It’s a strong signal of their ability to dance on the deck of the Titanic as profiteers of tragedy.

Anne-Catherine Husson-Traore,  @AC_HT, CEO of Novethic


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