According to a new study tougher action is needed to curb the effects of climate change as trillions of dollars of financial assets are vulnerable.
A raft of recent studies have kept the issue of climate change firmly in the spotlight. This latest paper, published on Monday, shows that taking tougher action on climate change is in the best interest of investors around the world, according to Reuters.
Study calls on investors to consider risks of climate change
The report, which was led by the London School of Economics, says that rising temperatures and the dislocation suffered due to droughts, floods and heatwaves will cause economic growth to slow and impact the performance of stocks and bonds.
“It makes financial sense to a risk-neutral investor to cut emissions, and even more so to the risk-averse,” lead author Professor Simon Dietz, an environmental economist, told Reuters. World leaders agreed to work to limit global warming to below 2 degrees Celsius above pre-industrial times, but didn’t provide any details on how this would be achieved.
If we could limit this rise to 2C by 2100, the study says that $1.7 trillion in assets would be damaged. If it rose by 2.5C there would be $2.5 trillion in assets at risk. According to the Financial Stability Board (FSB) all of the non-bank financial assets in the world are currently worth $143 trillion.
Assets could suffer due to storms and floods
The study estimates that the value at risk with a 2.5C rise ranges from 0.5% of total assets up to 17%, which means $24 trillion. There was no attempt made to identify which sectors could be most at risk, but the effects of global warming could lead to damaged buildings, bridges and roads from storms and floods, reduced agricultural activity and the enforced movement of populations.
Other studies into the environmental impact of climate change have tended to address fossil fuel companies, which are worth approximately $5 trillion on stock markets. Shares in the companies could lose value if investors decide to back alternative sources of energy.
Stephanie Pfeifer, head of the Institutional Investors Group on Climate Change (IIGC), said the report was “yet more evidence that unabated climate change would negatively impact economic growth and investment returns over the long term.”
Pfeifer said that investors should pressure businesses to disclose risks from climate change and commit to playing their role in limiting rising temperatures. The IIGC counts 120 investors who control over $13 trillion among its members.
Businesses should address risks of global warming
The FSB last week revealed plans for all listed companies to disclose their risk to climate change in financial reports.
Studies related to rising sea levels have also pointed out that millions of people would be forced to leave their homes if nothing is due to reduce global warming. The cost of relocating these people, and the competition for resources that would result, could have catastrophic effects on the U.S. economy.
Even now coastal cities such as Miami are being flooded with increasing regularity as rising global temperatures cause polar ice caps to melt. Despite an awareness of the potentially catastrophic effects, world leaders have so far not been able to reach an agreement on how to combat global warming.
Perhaps a consideration of the financial effects will convince more people that it is in their interest to do something about rising temperatures before it is too late.