Deutsche Bank Warns of Sudden Devaluation Risk Due to Climate Change

Markus Müller, Deutsche Bank’s Chief Investment Officer for ESG, has recently alerted investors to the significant risk of sudden devaluation resulting from climate change. In a client memo released this week, Müller highlighted the potential for unexpected “fat-tail” risks that could culminate in severe outcomes, countering the common belief that global warming’s impacts will be gradual.

Müller pointed out that there are imminent tipping points that could lead to drastic physical consequences related to climate change, reflecting similar concerns raised by analysts at Jefferies. These analysts have voiced their apprehensions about the lack of utilization of updated climate models for assessing risks by investors.

Drawing comparisons with the market crash of 2008, Müller categorized climate-related risks into four types: physical risks, transition risks (which encompass evolving regulations, technologies, and consumer preferences), liability risks, and contagion risks. He predicted that transition risks would arise in the short term, while physical risks are expected to manifest in the medium term.

The establishment of climate risk disclosure regulations in areas like the European Union and California has made potential losses clearer to investors. At the same time, the Securities and Exchange Commission is in the process of developing similar rules for all U.S. companies.

Müller emphasized the increasing significance of environmental, social, and governance (ESG) criteria in portfolio construction. He further suggested that if governments do not take sufficient action to mitigate these risks, central banks may need to tighten policy rates, potentially leading to substantial effects on bond and equity valuations.