Climate Change

Macro and markets, cash management

Past the tipping point

November 2019

Companies drag their heels on climate change because many managers believe that for the planet to win, profits must fall. And others don’t see the relevance to their customers. Evidence from stock market returns and Deutsche Bank research into shifts in customer purchase habits indicates otherwise, note Deutsche Bank’s Corporate Bank Focus Research team

In September 2019 Greta Thunberg, a 16-year-old Swedish schoolgirl addressed the UN Climate Action Summit in September 2019 with the stark accusation, “Entire ecosystems are collapsing. We are in the beginning of a mass extinction. And all you can talk about is money and fairy tales of eternal economic growth. How dare you!”

Having arrived from Sweden in a solar powered yacht to make the point that air travel was doing the environment no favours, air travel of that summer of 2019 was set to be suppressed as the extinction rebellion notched up headlines and environmental policies became more prominent in political campaigning.

 

Voice of data

Corporate and consumer behaviour determines how successful the planet’s current occupants are at pulling back from the tipping points – the points at which climate change cannot be reversed. The World Economic Forum helpfully reminds us what they are in the article “Four climate tipping points the planet is facing”1. In the spirit of optimism that continued efforts to change behaviour should be highlighted as it actually does connect with revenue and economic growth, Deutsche Bank’s Corporate Bank Focus Research team decided to take a closer look at what stock market returns and actual customer purchasing decisions were adding to the climate change discussion.

“We all remember how BP’s share price halved during Deepwater, but what about the smaller pieces of news that came out? Do they have an impact on share prices?” Deutsche Bank Analyst Luke Templeman, explains in his Podzept podcast, “Climate change and corporates” (20 September 2019) how the team set about finding out.

Dr Rebecca Harding

Jim Reid

Head of Deutsche Bank Corporate Bank Research

Dr Rebecca Harding

Luke Templeman

Independent economist

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Entire ecosystems are collapsing. We are in the beginning of a mass extinction. And all you can talk about is money and fairy tales of eternal economic growth. How dare you!

Greta Thunberg

“We turned our artificial intelligence platform dbDig, and programmed it to read the five million pages of company announcements released by the 1,600 companies in the MSCI World index over the last two decades, along with every Dow Jones news article written over the period (something that would take a human over a century to complete)”, says Templeman.

As for consumer behaviour, while companies know customers don’t always put their money where their mouth is when it comes to climate change and the “gap” between customer attitudes and actions towards green purchases has persisted for several decades, there has been, say Templeman and Head of Corporate Bank Research Jim Reid, ”a startling shift over the past 12 months” according to a Eurobarometer survey published in April 20192 .

Templeman and Reid went on to commission primary research via DBdig of 1,100 customers in the US and UK examining actual purchasing actions over the past 12 months. These were the questions they asked:

  • What have people actually bought?
  • What have they stopped buying?
  • Who are these customers and how much extra do they pay right now for climate-friendly products?

Answers, complete with summary charts and contact points for further data can be found in the Corporate Bank Focus Research team’s special report, Climate change and corporates – past the tipping point with customers and stockmarkets3, published in September 2019.

 

Company performance

After mapping the positive and negative climate change news (most of which were small references, not major scandals) against company share prices, the results revealed a number of surprises. Companies that experienced positive press on climate change saw share price outperformance of 1.4 percentage points per year over the MSCI World Index4 – outperformance of 26%. And the usual suspects – energy, materials and utilities – were not the sectors most sensitive to overall positive news flow, but rather technology, consumer staples and healthcare.

Conversely, companies with negative press saw underperformance. Furthermore, it was not the usual energy, materials, and utilities sectors that were affected the most.

However, the data showed that there were four periods of equity market falls where companies that had experienced negative headlines clawed back their losses – aligning with economic shocks such as the Global Financial Crisis, and the current trade wars. As Templeman and Reid put it, “It appears that equity investors are more sensitive to negative corporate environmental news when times are good but less discerning when the wider market is experiencing turbulence.”

In the wealth management space, the report’s authors note that the mega-trend of funds flowing to managers with sustainable mandates is clearly fuelling investor awareness of how share prices move with corporate climate change news. “Indeed”, they say, “The mayors of New York and London are not the only investors taking flight from climate-change related stocks. While some do so for reasons of principle, others do so on value grounds.” An example of this is investor belief that increased regulation will make, for example, the economics of miners and explorers less attractive demonstrated by BNP Paribas Asset Management’s announcement it is to divest up to €1bn of coal stocks5.

 

Consumer behaviour

“About a third of people have stopped buying a product from a company they ‘really liked’ after seeing bad environmental press on the company”,
note Templeman and Reid

The second half of the report explains why the historic ‘gap’ between the green purchase intentions of customers, and their actual purchase behaviour, has suddenly shrunk.

For decades, customers have intended to purchase more climate-friendly products, but failed to actually do so. But over the past 12 months, the team’s primary research indicates that twice as many customers in the UK have actively purchased more products from companies that address climate change compared with those who have not. A similar (but more polarised) trend exists in the US.

While customer boycotts have rarely dented corporate revenues, this is changing. However, urban customers are fickle and are more likely to rebuy the same product within 12 months.

Overall, when people are looking to improve their climate footprint, consumer goods are the first on the chopping block. And around half of them are happy paying more for a product or service if they know (or think they know) the company selling it is addressing climate change.

 

Unstoppable

This research not only demonstrates how customers have finally begun to purchase more climate-friendly products just as societal prompts have made individuals more likely to take personal ownership for climate change issues. Investors, point out the report’s authors, are seeing the benefits; “the 1.3 percentage point per annum outperformance of stocks that benefit from improved climate news speaks for itself,” they reflect.

In conclusion, they remind readers, “Once social movements hit a tipping point, they have proved very difficult to stop. And as government regulation on the issue continues to increase, climate change mitigation will become a normal part of doing business. Customers have spoken, investors have spoken. Those companies that do not listen will certainly be left behind.”

 

Data and sources

The full report, Climate change and corporates – past the tipping point with customers and stockmarkets can be downloaded here.

Climate Change Cover

And you can listen to Luke Templeman’s podcast discussing the research here.

 

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Sources

1 See https://bit.ly/35mk3i7 at weforum.org
2 See https://bit.ly/2rhfRBr at ec.euoropa.eu
3 See https://bit.ly/2raOfOy at dbresearch.com
4 FILE MISSING: file://C:\Users\u6e220\Downloads\flow\flow\When we looked at this chart there were four periods stocks with bad news clawed back their losses. This happened when the Equity market was falling, GFC, asia crisis, trade wars. Investors are conscious of bad news when markets are growing but less so when they are falling
5 See 'Divestment from coal: our new policy' at
https://bit.ly/338npDO, bnpparibas-am.lu

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