Climate change threatens US$2.5 trillion of financial assets, reveals new study

4th April 2016 Adam Pitt

An increase in global surface temperatures of 2.5°C above pre-industrial levels could put US$2.5 trillion of the world’s financial assets at risk by 2100, a new paper published today by the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science and Vivid Economics, reveals.

“Although the new study focuses on global asset valuations, other work on the incidence of climate change impacts suggests that southern Asia [including India], eastern Asia [excluding China], and [north] Africa are likely to be hit hardest,” Alex Bowen, Principal Research Fellow at the Grantham Research Institute on Climate Change and the Environment, and one of four contributors to the report told Development Finance. “The most vulnerable countries are low-income, low-latitude countries, due to a combination of adverse physical changes, high sensitivity to climate [variations], and low capacity to adapt.”

The findings, written by Bowen, Professor Simon Dietz; Vivid Economics’ Charlie Dixon and Philip Gradwell, are said to be consistent with an increasingly pessimistic outlook surrounding the impact of global warming on future economic growth. They also highlight the significant risks to long-term investment products like pension funds in their assessment of the broad financial impacts of efforts to cut carbon emissions.

Limiting climate change to 2°C would reduce the value of assets at risk to US$1.7 trillion, according to the report, and when factoring in the cost of reducing carbon emissions the average value of global financial assets is said to be US$315 billion higher than if warming of 2.5°C by 2100 occurred along a business as usual pathway for global emissions.

However, the report also notes that uncertainties in estimating the financial risk posed by climate change mean the value of assets at risk could be as high as US$24 trillion, or 16.9 percent of global financial assets. This figure is much larger than the estimates of US$5 trillion for the total stock market capitalisation of fossil fuel companies today, and suggests that both risk-neutral and risk-averse investors would benefit from cutting emissions.

“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,” said Professor Simon Dietz, Co-Director of the Grantham Research Institute on Climate Change and the Environment.

The Grantham Research Institute on Climate Change and the Environment is a leading international centre for climate and environmental policy research established in 2008 and funded by The Grantham Foundation for the Protection of the Environment.


Leave a Reply

Your email address will not be published. Required fields are marked *