As a result, there is a risk that the listed bonds and equities of companies in high carbon sectors are mispriced, which could lead to financial instability when the market recognises the realities of resource constraints owing to water scarcity and greenhouse gas (GHG) emission limits, and re-prices these securities accordingly.
"Making risk-adjusted returns is at the heart of the investment industry. Water scarcity and climate change are material risks yet our research shows that many investors are not taking these risks into account. This may result in future investments and financial market stability being severely compromised," says WWF-SA's Sustainable Business Programme manager, Malango Mughogho.
Constraints on returns that investors face from investments in South Africa's bond and equities markets as a result of climate policies and water scarcity include: