A new report claims that global warming of 2.5°C by 2100 could put at risk an average of $2.5 trillion, or 1.8%, of the world’s financial assets.
The report, published in the journal Nature Climate Change, by researchers at the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science and Vivid Economics, also noted, however, that there is a 1% chance that a warming of 2.5°C (or 4.5°F), could threaten a whopping $24 trillion, or 16.9%, of global financial assets in 2100, due to uncertainties in estimating the “climate Value at Risk.”
The researchers found, unsurprisingly, that limiting global warming to only 2°C by 2100 would significantly reduce the ‘climate Value at Risk,’ with the average value of global financial assets at risk under such a scenario sitting at $1.7 trillion, with a 1% chance of $13.2 trillion being at risk.
“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,” said Professor Simon Dietz, lead author of the paper. “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.”
Fears that we are already unable to limit global warming to 2°C are already beginning to spread, despite seemingly good progress made in political moves, such as the Paris agreement, and advances made in growing renewable energy.
The researchers also found that increasing our efforts to minimize global warming will not have a deleterious effect on financial assets, and will in fact end up increasing the value of global financial efforts by around 0.2%, or $315 billion, “than if warming of 2.5°C by 2100 occurred along a ‘business as usual’ pathway for global emissions.”
“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,” explained Dietz. “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 concerned about the potential for asset-price corrections due to an awareness of climate risks.”
The 1% dilemma from this report is the uncertainty in estimating the ‘climate value at Risk.’ Dietz explains: “Although this is the most comprehensive estimate so far 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 one of the first words on the topic, not the last. Our first estimate was published last year in a report by the Economist Intelligence Unit.”
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