Climate Science and the Financial Markets

Over at FT Energy Source Kate Mackenzie has a really interesting post about a report by Nick Robins of HSBC on the possible effects of recent public issues involving climate science (specifically, CRU and IPCC) on the HSBC Climate Change Index (CCI, details on the invest-able version here in PDF).

There are several really interesting things here. First, since 2007 the CCI consistently outperformed the MSCI World Index. When the release of the CRU emails occurred, there was no noticeable negative effect on the market index as compared to the global benchmark. However, following the issues associated with the IPCC, the CCI has underperformed with respect to the global benchmark. This is suggestive only, as I would have expected that the dismal outcome from Copenhagen to be much more important all along. So while we can conclude that the CRU leak has been irrelevant to the markets, it is not possible to conclude the same with respect to the IPCC.

And this brings us to another very interesting point and that is the perceived (and perhaps real) connection between what the IPCC says and the movement of markets. Reuters says of the HSBC report:

"We believe that any market impacts over climate science may be nearing its floor, with the results of the three independent reviews confirming the integrity of the climate science," the report said.

For the rest of this year, HSBC identified four factors that should catalyze a revival in public concern and market confidence.

A review on the U.N.'s Intergovernmental Panel on Climate Change (IPCC) will be finalized at the end of August and governments will meet in October to take any remedial measures.

"We believe that practical steps to strengthen the IPCC's procedures would represent a positive outcome from this saga. The IPCC also has the opportunity to regain momentum with its special report on renewables later in the year," Robins said.

Because the IPCC is perceived to move markets, as least the sliver of the market associated with climate change, and thus management of actual or perceived conflicts of interest are more than a matter of speculation, but very tangible.

And in case you are curious, the largest company in the HSBC CCI is Veolia Environment (PDF), a French Company. IPCC Chairman Rajendra Pachauri sits on two of their committees and his home institution has received funding from Veolia Environment.

At FT Energy Source Mackenzie writes of the HSBC report:

They say three independent reviews into climate science - the key one being the Inter Academy Council review of the IPCC reports, due by August, will assuage doubts about climate science — adding that the IPCC’s general meeting in October and its reports, due out some time in H2, on renewable energy and managing the risks of extreme events will also provide opportunities for a confidence boost.

No kidding? Smart money says you'd better line up your investments in the HSBC CCI while the getting is good!