Climate-driven repricing of real assets to be ‘gradual’ – PGIM

PGIM chief operating officer Taimur Hyat says other parts of the economy face greater risk of abrupt repricing due to the growing salience of climate risk.

A climate-induced re-pricing of real assets such as agriculture will be more gradual than in other sectors because of the industry’s intrinsic attention to physical risk and environmental data, said a chief operating officer of PGIM.

Taimur Hyat told Agri investor the increasing salience of climate means risks that have previously been ignored will be factored into both private real asset and public securities prices during the years ahead.

While physical climate risk has always been key for managers of real estate, infrastructure and agricultural assets, sectors such as consumer goods and technology manufacturers with long supply chains, for example, face greater threat of hidden risks as they consider climate for the first time, he said.

“Real assets, including agriculture, are much more likely to have a more gradual re-pricing than a Minsky Moment where there would be an abrupt shock to the system,” said Hyat, who co-authored PGIM’s Weathering Climate Change report.

“There is just much more of a natural synergy between investors’ desire to enhance risk-adjusted return and investors’ desire to meet broader ESG goals, which converge quite neatly in real assets. Whereas in the public security world, there is a bit more of a tradeoff.”

A PGIM survey of global chief investment officers cited in the report found 40 percent of CIOs do not incorporate climate into their decision-making. Hyat said the increasing sophistication of widely available environmental data has helped accelerate a dialogue around managing physical risk, especially over the past five years.

“Big asset owners are increasingly looking at their real asset managers to incorporate climate risk into how they invest, either because they believe it leads to better risk/return outcomes, or because they have a climate imperative based on ESG or net-zero goals,” he said. “That pressure will only grow from investors to start thinking about how to incorporate climate change into pricing.”

PGIM is the Newark, New Jersey headquartered asset management subsidiary of Prudential Insurance Company.

The February report provides an overview of how financial markets are adjusting to increasing evidence of a tipping point on climate. It projects winners and losers among sectors and regions and describes the contours of an emerging “new industrial age” that adequately accounts for environmental risks and externalities.

“It is no longer a matter of if this re-pricing will occur,” Hyat and co-author PGIM president and chief executive officer David Hunt wrote. “The real question is whether the transition will be an orderly one ushered in by government measures and gradual market adjustments, or an abrupt, sharp decline in market sentiment.”

For agriculture, PGIM’s report highlights how deviations from longstanding temperature and rainfall patterns are expected to help produce heat stress for livestock and crops, salination of farmland from sea-level rise and the emergence of new weeds, insects, vermin and crop disease.

Pakistan, Nigeria and Iran are among the countries that could be most impacted by the 6 to 14 percent decrease in wheat, corn and rice yields that would accompany a two degree increase in global temperatures. Northern Europe, Canada and Russia, meanwhile, stand to benefit from increasing yields and a potential shift of economic production away from the equator, according to PGIM.

While fear of litigation will help individual companies become more transparent around climate risk, Hyat said government policy will be the biggest driver of any climate-driven asset re-pricing in the near-term. He highlighted the Biden administration’s steps to re-join the Paris Climate accords and said investors will be watching closely how climate shapes infrastructure spending and other government initiatives.

“We saw what it did to carbon emissions pricing in Europe,” he said, speaking of the role of policy. “Similar things will happen in other areas as governments intervene.”