Our Wealth Faces A Greater Risk Due To The Changing Climate

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Do you want to know how much climate change could cost the global economy? UK-based researchers have come up with an answer, which they present with some surprising qualifications.

If global average surface temperature rises by 2.5°C over its pre-industrial level by 2100, they say, then an average of US$2.5 trillion, or 1.8%, of the world’s financial assets would be at risk from the impacts of climate change.

The researchers found that limiting warming to 2°C in 2100 would significantly reduce the “climate Value at Risk” (VaR), which measures the risk to investments, estimating how much they might lose given normal market conditions in a set time period.

The average value of global financial assets at risk would be $1.7 trillion, with a one per cent chance of $13.2 trillion being at risk, they add.

Inevitable uncertainties

At the UN climate conference in Paris last December, 195 countries agreed to work to keep global temperature rise this century well below 2°C, and to drive efforts to limit the increase even further, to only 1.5°C above pre-industrial levels. So this estimate sounds fairly reassuring.

But suppose the world overshoots the Paris target and ends up above 2°C by the end of the century? Estimating VaR is by no means an exact science, and the researchers found that the inevitable uncertainties in trying to establish it mean the average risk fails again to tell the whole story.

They say there is a one per cent chance that, in a world 2.5°C warmer, the total level of global financial assets at risk in 2100 could reach $24 trillion, or 16.9% of assets.

The authors point out that this total is almost five times greater than the estimates of $5 trillion for the total stock market capitalisation of fossil fuel companies today.

“Our results may surprise investors, but they will not surprise many economists working on climate change”

The researchers, from the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science and Vivid Economics, publish their findings in Nature Climate Change journal.

The lead author, Professor Simon Dietz, says: “Our results may surprise investors, but they will not surprise many economists working on climate change, because economic models have over the past few years been generating increasingly pessimistic estimates of the impacts of global warming on future economic growth.

Financial assets

“When we take into account the financial impacts of efforts to cut emissions, we still find the expected value of financial assets is higher in a world that limits warming to 2°C. This means risk-neutral investors would choose to cut emissions, and risk-averse investors would be even more keen to do so.

“Our research illustrates the risks of climate change to investment returns in the long run and shows why it should be an important issue for all long-term investors, such as pension funds, as well as financial regulators.”

Of the uncertainties in estimating the climate VaR, he says: “Although we are the first to produce a comprehensive estimate of the climate Value at Risk using an economic model, it is important to remember there are huge uncertainties and difficulties in performing economic modelling of climate change, so this should be seen as the first word on the topic, not the last.” – Climate News Network

About the Author

Alex Kirby is a British journalistAlex Kirby is a British journalist specializing in environmental issues. He worked in various capacities at the British Broadcasting Corporation (BBC) for nearly 20 years and left the BBC in 1998 to work as a freelance journalist. He also provides media skills training to companies, universities and NGOs. He is also currently the environmental correspondent for BBC News Online, and hosted BBC Radio 4's environment series, Costing the Earth. He also writes for The Guardian and Climate News Network. He also writes a regular column for BBC Wildlife magazine.

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