Study Sends a Warning to Wall Street of Trillions at Risk From Climate Change

Financial risk to the global economy lessens if global warming is held to 2 degrees Celsius, researchers find, but business as usual has a steep price.

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UN Secretary General Ban Ki-moon speaks at the Paris climate conference in December 2015
UN Secretary General Ban Ki-moon explains the urgency of the 2 degrees Celsius goal at the Paris climate conference last December. Credit: Getty Images

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Climate change may wipe out $2.5 trillion, or 1.8 percent of the world’s financial assets, by the end of this century if the planet continues to warm at its current rate, according to a new study.

That would be the most likely outcome under business as usual, according to researchers whose peer-reviewed study was published Monday in the journal Nature Climate Change. In the study’s worst-case scenario, the current rate of warming could threaten $24 trillion, or 16.9 percent of global financial assets, by 2100. Economic models used in the study put the chances of the worst-case scenario at 1 percent.

The study builds on previous initiatives that focused on “stranded assets,” or the amount of coal, oil and natural gas reserves that fossil fuel companies may have to leave in the ground because burning them would exceed emissions limits set by global climate agreements. The findings stress the need for financial regulators to give climate risks greater scrutiny, said lead author Simon Dietz.

“It broadens the story,” said Dietz, who is co-director of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science. “We are contributing to recent calls for climate change to be on the agenda of financial regulators in encouraging companies to disclose their climate change risks so that investors can make informed decisions.”

Those potential risks include extreme weather events such as floods or storms that destroy factories or other infrastructure. Other, indirect risks could include fossil fuel-based power generation becoming more costly because it depends on abundant supplies of cold water for cooling.

“The nexus of climate change and investment is not just coal companies and oil and gas companies,” Dietz said. “It’s a much broader set of companies. In fact it could be an issue at the whole-economy level.”

The worst-case scenario assumes a business-as-usual level of warming in which global average surface temperatures increase by 2.5 degrees Celsius (4.5 degrees Fahrenheit) by 2100, compared with pre-industrial age levels. Delegates to the world climate talks in December in Paris agreed to try to keep warming below 2 degrees Celsius, the level generally believed to hold off the most catastrophic effects of climate change.

The worst-case loss of $24 trillion in assets would far exceed the total market capitalization of all fossil fuel companies today, estimated at $5 trillion. That potential loss would also be significantly greater than the $17.3 trillion annual gross domestic product of the U.S., the world’s largest economy.

Limiting warming to 2 degrees by 2100 by reining in greenhouse gas emissions would significantly reduce financial risk, the study showed. In that case, losses would be reduced to $1.7 trillion of global financial assets, based on the average of various risk assessments.

Reaching the 2 degrees goal would require significant investments in clean energy infrastructure. Such costs, however, would be more than offset by the decreased risk to financial assets, the researchers found. When the costs of reducing greenhouse gas emissions to that level were included in the calculations, the value of global financial assets would be $315 billion higher than if the planet were allowed to warm by 2.5 degrees, according to the study.

“That was a bit of a surprise to us,” Dietz said. “A lot of economists have thought that you maybe need a broader perspective than just narrow financial assets, and you might need a longer time horizon than just this century to support the case for reducing emissions, but we don’t find that.”

Studies warning of the global financial risks posed by climate change go back years. In a watershed report from 2006, British climate economist Nicholas Stern warned that failing to act on climate change could reduce global GDP by as much as 20 percent.

Most recently, a 2015 report by The Economist Intelligence Unit, the research and analysis division of The Economist Group, which publishes The Economist magazine, found financial asset losses would be $2 trillion if warming were limited to 2 degrees by 2100. That report, which lists Dietz as a contributor, found that for temperature increases above 2 degrees the financial risk was significantly higher. At 5 degrees of warming, the average expected financial loss based on economic models was $7 trillion.  

The current study “confirms the tremendous financial risks associated with failing to keep warming below 2 degrees,” said Shanna Cleveland, a senior manager at Ceres, a Boston-based nonprofit that works with the business community on sustainability and climate change issues. “Too many companies, especially fossil fuel companies, fail to factor in the negative impacts on economic growth that climate change will have on their forecasts for demand and price.

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