Climate change could cost global economy US$24 trillion

A new report by the London School of Economics and Political Science is the first comprehensive study to use an economic model to put a number on the “climate value at risk”.

A new report published on Monday has put the potential cost of climate change to the world economy at as much as US$24 trillion by 2100, underlining the urgent need for businesses worldwide to pay attention to it.

The report, led 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, is the first comprehensive study to use an economic model to put a number on the “climate value at risk”.

The study, published in the journal Nature Climate Change estimated that an average US$2.5 trillion, or 1.8 per cent, of the world’s financial assets would be at risk from the impacts of climate change if global temperatures rise by 2.5 deg C above its pre-industrial level by 2100.

But uncertainties in estimating this risk mean that “there is a one per cent chance” that warming of 2.5 deg C could threaten US$24 trillion, or 16.8 per cent, of global financial assets in 2100.

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.

Professor Simon Dietz, researcher, Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science and Vivid Economics

These sums overshadow the estimated US$5 trillion total stock market worth of fossil fuel companies today.

The authors - Simon Dietz, Alex Bowen, Charlie Dixon and Philip Gradwell - said however that limiting warming to 2 deg C in 2100 – a goal set out in the historic Paris Agreement inked in December by the world’s nations to tackle climate change - would significantly reduce this value.

The average value of global financial assets at risk would be US$1.7 trillion in comparison, with 1 per cent chance of US$13.2 trillion being at risk.

The report comes just as concerns about the risk of climate change on businesses and financial markets have been mounting worldwide.

Globally, more frequent and intense hurricanes and downpours such from United Kingdom to Fiji in the past year have already been causing billions of dollars in damage to property and infrastructure.

Rising water scarcity and declining crop yields due to prolonged drought and high temperatures, especially in Africa, is also disrupting global food supply chains and putting many farmers and people at risk of hunger and poverty.

In December last year, the Financial Stability Board (FSB) – an international body set up by the G20 in 2009 to monitor risks to the financial system – set up a task force to look specifically at climate-related financial disclosures.

Mark Carney, the governor of the Bank of England and chair of the FSB, had warned last year that “climate change is the tragedy of the horizon”.

“We don’t need an army of actuaries to tell us that the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors – imposing a cost on future generations that the current generation has no direct incentive to fix,” he said in a speech to the insurance industry.

To help businesses and investors understand and tackle these risks, the FSB’s Task Force on Climate-related Financial Disclosures (TCFD), chaired by former New York mayor and billionaire philanthropist Michael Bloomberg, will develop a consistent framework on climate-related financial risk closures for companies.

Bloomberg had noted that the current reporting frameworks for such risks is fragmented, making it difficult for companies to determine what information should be included and how it should be presented.

Last week, the TCFD issued a report for its first phase of work that sets out fundamental disclosure principles for companies to adopt.

It sets out four main types of information to be disclosed, namely, climate-related risks, financial risks, physical and non-phsyical risks, and varied impacts (of climate change) on a business.

The next phase of its work, due to be completed by the end of this year, will then deliver specific recommendations and guidelines for voluntary disclosure along these areas of focus.

Professor Simon Dietzm lead author of the study, emphasised the need for the finance industry to pay attention to climate risks: “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.”

“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,” he added.

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