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Investors Panic During Natural Disasters. Who Wins When They Do?

Investors overact when companies are exposed to disaster — but their environmental scores matter in a sell-off, according to a study.

When natural disasters spark panic selling, U.S. stocks and bonds of companies with stronger environmental profiles fall under less pressure, according to research from Australia’s Monash University. 

“The United States is among the top three countries hit by the greatest number of natural disasters over the past two decades,” Monash University’s Thanh Huynh and Ying Xia said in their recent paper examining how investors react to natural disasters. “Extreme climatic events” will cost most metropolitan areas in the U.S. at least one percent of gross domestic product by 2060-2080, they said, citing BlackRock’s 2019 prediction.

That estimate was based on a “no climate action” scenario, according to the researchers, who noted companies’ sales suffer when they are struck by natural disasters such as hurricanes, wildfires, tornadoes, floods and droughts. They found that sell-offs in stocks and bonds are “less pronounced” for companies with a high environmental score — despite equal sale losses.

“Firms with strong environmental profiles, high long-term institutional ownership, and high sustainability-oriented institutional ownership experience lower selling pressure when being exposed to disasters,” the researchers said. Investors “impose a lower penalty on these firms’ stocks and bonds.”

[II Deep Dive: Natural Catastrophes Are Heading for Investors’ Portfolios]

The authors examined a total 640,203 of establishments — or branches, plants and subsidiaries — of U.S. companies. In their sample, companies had an average of 75 establishments.  

“A firm is deemed to be exposed to disasters when its establishments are located in disaster-struck counties,” the authors wrote. Investors tend to overreact when natural disasters strike, depressing companies’ bond and stock prices, their research found, setting the stage for future higher returns. 

“When a firm’s establishments are located in counties hit by natural disasters, its future monthly stock returns increase by 14.6 basis points,” the authors said, while future monthly bond returns increase by 8.4 basis points. “As prices drop below fundamental values, they will bounce back.”

Companies can mitigate the selling pressure by investing in their environmental profiles to achieve higher scores tied to the MSCI ESG database, according to the paper. “It pays off when the consequences of climate change are materialized,” the researchers said. 

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