Stress-Testing an  Alien Invasion: Are Financial Markets Mispricing the Biggest Systemic Risk Ever?

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Fermi’nvesting Initiative (Fii) is launching its first report today: Stress-testing Alien Invasion: Are Financial Markets Mispricing the Biggest Systemic Risk Ever?

Despite the growing body of evidence around alien risks and their increased likelihood (e.g. 30% growth in UFO sightings), an analysis of current financial risk models and investment processes suggest that these risks are currently not integrated into investment decisions, potentially at least in part as a result of the growing attention on climate risk.

Building on the risk taxonomy from the leading investment consultancy Towers Watson (Link), the report represents the first quantitative analysis of potential financial risk to portfolios associated with an alien invasion, based on the Fii open-source E-TRIPS model, and develops a set of key recommendations.

The report finds that the there is a growing body of evidence that an alien invasion is likely to occur in the near future and that this risk could be systemic, with particular exposures to high-carbon fossil fuel companies that could face significant stranding of assets. The analysis mobilizes asset-level, bottom-up UFO sightings data with top-down scenario analysis based on a review of over 1000 Hollywood movies to isolate key georaphic risks, with particular exposure to risks in the United States, the United Kingdom, and the Netherlands. It also identifies key winners, notably Switzerland (given access to alternative weapons systems) and Israel. The quantitative analysis also finds that a ‘low-carbon portfolio’ reducing Scope 1 + 2 GHG emissions reduces risks significantly. Fii analysis suggests that the current development of the carbon footprint of investment portfolios could thus provide a first response to this problem and be used as a proxy for aliens-related financial risks.

The report concludes that key barriers to analyzing these risks in the future include the lack of historical data and capacity, ‘alien-washing’ by institutional investors and analysts, and a lack of disclosure. It also develops a set of 10 key recommendations.

The report marks the first in a planned series of research and outreach in the next months and years.