There are those dark days on the stock market that come out of the blue. So also this Monday. The German share index Dax fell by almost four percent in the meantime, which is the highest loss since November. Investors say there are fears of a rise in interest rates and, of course, the conflict in Ukraine is also causing concern. These kinds of volatility happen from time to time – they’re part of the daily stock market business. And when that happens, your nerves are on edge.
Buy? To sell? And above all: What happens next day?
And then there are those long-term financial market risks that pundits worry about well in advance. For example, when it comes to the question of how climate policy and the energy transition could affect stock prices. A question that the Bundesbank has now examined in a study. And states: It is “to be expected that companies will be reassessed according to their ecological footprint and their cost-effectiveness,” says the monthly report, which was published on Monday. In other words: There could be price turbulence on the stock exchanges in the medium term. The reason: As important as increasing the price of pollutant emissions may be for achieving the Paris climate goals – the rising costs will weigh on companies and financial institutions, and some may be overwhelmed.
The Bundesbank’s experts have examined the potential stock market price losses of 5,285 public limited companies in 75 countries. The ensemble of securities represents more than half of the global market capitalization – the companies are responsible for 17 to 20 percent of global greenhouse gas emissions.
How do these companies tolerate the politically desired increase in the price of greenhouse gases? Answer: Around 15 percent of all companies surveyed “suffer losses of more than half of the company’s value as a result of higher issuing costs,” according to the Bundesbank. The good news is that the vast majority of companies (around 80 percent) would have to reckon with a maximum price loss of four percent due to the rising costs of greenhouse gas emissions.
There is excellent debate about the monetary effects of climate policy. Most recently, the ECB warned that the transformation of the economy could lead to higher prices in the shopping basket. The international financial markets should support climate neutrality. With the planned introduction of the EU taxonomy, they will soon have rules as to which economic sectors are “green”. The current argument over whether gas and nuclear power are “green” shows how difficult things could become. Experts are already complaining about “greenwashing”. The accusation: Some banks and investment companies sell their products as “green and sustainable” even though they are not. Nevertheless, the interest in sustainable ESG funds is immense, which has driven prices up. Some experts therefore fear a dangerous price bubble.
The Bundesbank study finds that the exchange rate effects of higher CO₂ prices vary depending on the economic sector. Companies with high emission costs or poor cost-effectiveness suffer more than others. It would be particularly difficult for companies whose business areas are geared towards fossil fuels, such as airlines and the coal, steel and cement industries.
Especially from these sectors, some listed companies could also disappear from the market very quickly due to cost overload for greenhouse gas emissions. The technical term for this is “stranded”, which amounts to a complete devaluation of the company concerned. The Bundesbank estimates that in the worst case, up to 4.4 trillion euros in market value could disappear into thin air.
The Bundesbank points out that these are not forecasts but possible scenarios: the damage to the stock market price depends on the one hand on the political framework and on the other hand on whether companies can pass on the additional costs to customers.