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MarketScreener Homepage  >  Equities  >  Xetra  >  Deutsche Bank AG    DBK   DE0005140008

DEUTSCHE BANK AG

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Climate change and corporates: Past the tipping point with customers and stockmarkets

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09/18/2019 | 01:17am EDT

Deutsche Bank

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Climate change and corporates

Past the tipping point with customers and stockmarkets

#PositiveImpact

Corporate Bank Research September 2019

Abstract

Companies drag their heels on addressing climate change because many managers believe that for the planet to win, profits must fall. Others believe the issue is not as relevant for their customers. This report argues the opposite using evidence from both stockmarket returns and our own primary research into the unexpected shift in customer purchase habits over the last 12 months.

To analyse the stock impact, we programmed our artificial intelligence platform, αDIG, to map company stock prices after reading the five million pages of company announcements released by the 1,600 MSCI World companies 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!)

The results were startling. Companies that experienced positive press and announcements on climate change saw share price outperformance of 1.4 percentage points per year over the MSCI World index - outperformance of 26 per cent. Conversely, bad press results in underperformance. Furthermore, it was not the energy, materials, and utilities sectors that were the most affected.

For the second half of this report we commissioned an exclusive survey that analysed data from 1,100 customers in the US and UK. It explains why the historic 'gap' between green purchase intentions and actual purchase behaviour has suddenly shrunk.

Some unexpected results included the finding that, over the last 12 months, 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. Even more surprising is how middle-income groups frequently lead the way, not the wealthy, while the urban/rural divide largely determines whether a customer shuns a product and how long it takes them to forgive the company and repurchase.

Overall, the big question is whether the recent conflux of climate change prompts in society, such as high-profile documentaries, election results, and a Swedish teenager sailing across the Atlantic, will maintain the attention of customers, investors, and the public at large. History suggests it will. 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.

Luke Templeman and Jim Reid luke.templeman@db.com / jim.reid@db.com

Summary on a page

Company performance

−− Small climate change news makes a difference. Companies that are the subject of positive climate change news, and make positive announcements, have seen their stock outperform the MSCI World Index by 0.8 percentage points per year, outperformance of 15 per cent.

−− The improvement in news and announcements matters the most. No matter what the baseline, greater amounts of positive press and company announcements over the preceding 12 months leads to returns of 1.4 percentage points over the MSCI World index, outperformance of 26 per cent.

−− Increasingly negative climate change news causes a stock to lose 0.3 percentage points relative to the MSCI World Index, underperformance of 5 per cent. This

is irrespective of whether the stock was previously seen as being strong or weak on climate change.

−− However, the underperformance is far more pronounced in periods when equity markets rise. The underperformance is recouped, to an extent, when equity markets fall.

−− The usual suspects (energy, materials, utilities) are not the sectors most sensitive to overall positive news flow. Rather, it

is technology, consumer staples, and healthcare.

−− Those stocks most sensitive to improvements in newsflow are utilities, consumer staples, and industrials.

−− Stocks most sensitive to a deterioration in climate change news and announcements over the preceding 12 months include those in the technology, financials, and real estate sectors.

Consumer behaviour

−− For decades, customers have intended to purchase more climate-friendly products, but they have failed to actually do so.

Recently, this appears to have changed.

−− Over the last 12 months, the number of people in the UK that have actively purchased more products from companies they see as climate friendly has outstripped those who do not by two to one. The US shows a similar effect (albeit more polarised).

−− Whether a company's products are high- quality or low-cost is largely irrelevant. Customers in both segments have changed their purchasing decisions by a similar amount because of climate change concerns.

−− Counter-intuitively,high-income earners are not necessarily the target market. In the US, middle-income groups buy the most climate- friendly products. Meanwhile a smaller proportion of wealthy Americas buy climate- friendly products compared with the very poorest Americans. In contrast Britons tend to buy more as their income increases.

−− People have paid more for climate-friendly products in small increments. Only about

15 per cent of people have paid more than ten per cent extra in one hit, however, half of people have ratcheted up the price of a purchase in increments of up to five per cent.

−− Historically, customer boycotts have rarely dented corporate revenues. However, this is changing. About a third of people have stopped buying a product from a company they "really liked" after seeing bad environmental press on the company.

−− While urban customers are the most likely to shun a product because of environmental concerns, they are also the most fickle and are more likely to rebuy the same product within 12 months. The same fickleness applies to people who believe they have very good knowledge of environmental issues.

Deutsche Bank Research / Climate change and corporates

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Introduction

Public pressure has passed a tipping point

Most tipping points are only obvious in retrospect but the recent change in public mood on climate change has been breathtakingly quick and there are many catalysts we can point to. Just a few include David Attenborough's Blue Planet 2 documentary which led grocery stores to commit to eliminating plastic. The extinction rebellion protests saw fast fashion chains sucked into the debate, while Greta Thunberg is credited with single-handedly suppressing air travel over the summer of 2019.

Even in the US, which is more polarised than most, public opinion has sharply swung over the last two years. As the following chart shows, a comfortable majority of Americans think that global warming is caused mostly by humans.

How Americans perceive climate change

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The divergence has

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accelerated since late-2017

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Think global warming is caused mostly by human activities

Think global warming is caused mostly by natural changes in the environment

Source: Yale program on climate change communication

Environmental policies have been at the forefront of several contenders for next year's presidential election. Furthermore, the Business Roundtable recently issued a new Statement of Purpose, where it ditched its traditional 'shareholder first' axiom and included "communities" as one of five stakeholders. Specifically, it now requires companies to "protect the environment".

In Europe, support for stricter climate change policies is even stronger, something that was highlighted in the continent-wide elections in May. Green parties across Europe had one of their best ever electoral performances, coming second in Germany with over a fifth of the vote, and third in both France and Ireland. In fact, the Greens-EFA group in the European Parliament, albeit also including some regionalist parties as well as green ones, now comprise about a tenth of MEPs.

This fits with a Eurobarometer survey which showed climate change was the second most important issue among Europeans and rising (immigration was first and falling). Another Eurobarometer survey showed that more than nine out of ten Europeans want their national governments to "set ambitious targets to increase renewable energy use by 2030".

Deutsche Bank Research / Climate change and corporates

4

Electoral success has had an immediate impact on the policy position of the European Commission. President-elect Ursula von der Leyen recently said she wants Europe "to become the first climate-neutral continent in the world by 2050."

Policy change is already occurring. As the following chart shows, the number of new regulations that have been implemented relating to ESG issues (environmental, social, and governance) has more than tripled since the financial crisis.

Cumulative number of policy interventions, recorded by the UN PRI (counting individual revisions separately)

400

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50

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'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Source: Deutsche Bank, UN Principles for Responsible Investments

Deutsche Bank Research / Climate change and corporates

5

This is an excerpt of the original content. To continue reading it, access the original document here.

Disclaimer

Deutsche Bank AG published this content on 18 September 2019 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 18 September 2019 05:16:06 UTC

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