Climate change’s effect on global financial assets

29th Apr 2016

In a world where the economy reigns over all else in importance, talking about global financial and economic impact and to argue in favour of climate action may seem radical, especially since conservatives paint “going green” as the costliest move a nation could take. Yet, a new study published in the journal Nature Climate Change, shows how climate inaction could cost trillions of dollars in asset devaluation.

According to the London School of Economics, “If the rise were limited to 2°C by 2100, the study’s central scenario put the total of current financial assets that could be damaged at $1.7 trillion. But if the temperature rose a further 0.5°C by the end of the century, $2.5 trillion would be at risk under the most likely scenario.”

The lead author on the paper, Professor Simon Dietz, said: “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. But we also found that cutting greenhouse gases to limit global warming to no more than 2°C substantially reduces the Climate Value at Risk, particularly the tail risk of big losses.”

In another statement, Dietz said,“There is no scenario in which the risk to financial assets are unaffected by climate change. That is just a fiction. There will be winners and losers.” The risk of financial asset devaluation due to a 2.5°C increase in temperature, in its extremes, went from 0.5% on the low end, to 17%, or $24 trillion, in the worst-case scenario.

Though shifting economies away from fossil fuels is costly, at an estimated $1 trillion per year, not doing so may be even costlier. There have been previous studies focused on displaying how actual production lines would be affected by climate change, but the Nature Climate Change study by Dietz, Bowen, Dixon, and Gradwell, shows how investors may change their overall behaviour as, for example, fossil fuel companies and the like, lose value. It is a certainty that investments in fossil fuels will show themselves to be riskier, even if they currently make financial sense.

Saudi Arabia is even looking towards a post-oil era; Deputy Crown Prince Mohammed bin Salman confirmed a rumour that the country will open up foreign investment in Saudi Aramco, the world’s largest company, worth over $1 trillion, in order to diversify investments, and not be solely dependent on oil. According to the Guardian, “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.”

Nations and corporations are beginning to see the value of investing in the clean technologies of the future, as climate change continues to affect people all over the globe. Those who control the world’s financial assets are writing history with their investment decisions. Some want to squeeze all they can out of fossil fuels, but it has been shown that if countries want to stay on track for their climate commitments, such as those made at COP21 in Paris last December, a lot of those fossil fuels will have to stay in the ground.

We can never definitively say how things could have been worse or better, but we can observe the trajectory of decisions currently being made. Researchers are finally talking about climate change in a language everyone can understand – money. Long-term investments will yield higher profits, and be better for the planet, if they are funding cleaner technologies that can keep temperatures from rising 2°C above pre-industrial levels.

The World Economic Forum deemed disasters due to climate change to be the biggest potential threat the global economy this year. There is even debate that the results of this study show conservative estimates of potential financial losses because the models are based on GDP, and that the actual financial and economic repercussions could be far worse. Mark Campanale of the think tank Carbon Tracker Initiative, said, “Just look at the value of coal giant Peabody Energy. It was worth billions just a few years ago and now it’s worth nothing.”

Sarah Sakeena Marshall, B.S. Environmental Policy

 

 

 

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