Climate change could cut the world’s financial assets by $2.5tn, according to the first estimate from economic modelling. In the worst case scenarios, often used to check the financial health of companies and economies, the losses could soar to $24tn, or 17% of the world’s assets, and wreck the global economy.
The research also showed the financial sense in taking action to keep climate change under the 2C danger limit agreed by the world’s nations. In this scenario, the value of financial assets would fall by $315bn less, even when the costs of cutting emissions are included.
The Bank of England and World Bank have warned of the risks to the global economy of climate change and the G20 has asked the international Financial Stability Board to investigate the issue. In January, the World Economic Forum said a catastrophe caused by climate change was the biggest potential threat to the global economy in 2016.
“Physical climate change impacts are a systemic risk on a massive scale,” said Ben Caldecott, the director of the sustainable finance programme at the University of Oxford. “Investors can do much more to differentiate between companies more or less exposed and they can help reduce the risk to the global economy by supporting ambitious action on climate change.”
The new study, published in the peer-reviewed journal Nature Climate Change, used economic modelling to estimate the impact of unchecked climate change. It found that in that scenario, the assets were effectively overvalued today by $2.5tn, but that there was a 1% chance that the overvaluation could be as high as $24tn.
The losses would be caused by the direct destruction of assets by increasingly extreme weather events and also by a reduction in earnings for those affected by high temperatures, drought and other climate change impacts.
If action is taken to tackle climate change, the study found the financial losses would be reduced overall, but that other assets such as fossil fuel companies would lose value. Scientists have shown that most of the coal, oil and gas reserves such companies own will have stay in the ground if the global rise in temperature is to be kept under 2C. The total stock market capitalisation of fossil fuel companies today is about $5tn.
“There is no scenario in which the risk to financial assets are unaffected by climate change. That is just a fiction,” said Dietz. “There will be winners and losers.” Major investors such as Norway’s sovereign wealth fund, the world’s biggest, have already begun selling off high-carbon stocks such as coal companies.
Investors have also been warned about investing in new coal and gas fired power stations after 2017 by a second new study. The research shows that, to meet the 2C target, no new carbon-emitting power stations can be built anywhere in the world unless they are later closed down or retrofitted with carbon capture and storage technology.
“Investors putting money into new carbon-emitting infrastructure need to ask hard questions about how long those assets will operate for, and assess the risk of future shut-downs and write-offs,” said Prof Cameron Hepburn of the University of Oxford.