According to a new study, global warming of 2.5 centigrade degrees by the year 2100 would risk trillions of dollars of world’s financial assets
As per a research by Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science and Vivid Economics, which was published on April 4, 2016, in ‘Nature Climate Change’ journal, an average of Dollar 2.5 trillion or 1.8 pc of the world’s financial assets would be at risk from the impacts of climate change if global surface temperature rises by 2.5°C above its pre-industrial level by 2100.
Authors, Simon Dietz, Alex Bowen, Charlie Dixon and Philip Gradwell, found that uncertainties in estimating the ‘climate value at risk’ mean that there is 1 pc chance that warming of 2.5°C could threaten Dollar 24 trillion or 16.9 pc of global financial assets in the year 2100. They point out that these sums are larger than the estimates of Dollar 5 trillion for the total stock market capitalisation of fossil fuel companies today.
The average value of global financial assets at risk would be Dollar 1.7 trillion, with 1 pc chance of Dollar 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. 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,” lead author on the paper, Professor Simon Dietz said.
Even when the authors factored on the costs of reducing greenhouse gas emissions to limit warming to 2°C, the average value of global financial assets would be Dollar 315 billion or 0.2 pc points.
Professor Dietz said, “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. 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,” he added.
Drawing attention on the uncertainties in estimating the climate value at risk, he said, “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.”