Could climate change destroy $24trn in financial assets?

A 'worst case scenario' climate change impact could see $24trn wiped-out from assets, placing 17% of the world's economy at severe risk, new research from the London School of Economics (LSE) has warned.

New research has suggested that failing to limit global warming to the widely-accepted ‘safe level’ of 2C would ‘significantly reduce’ the potential financial implications of climate change, which looks set to damage global assets to the tune of $2.5trn on a ‘business as usual’ trajectory.

Research from LSE, in collaboration with the Grantham Research Institute, suggests that the current temperature rise trajectory of 2.5C above a pre-industrial level by 2100, would wipe-out 1.8% of the world’s financial assets, with a 1% chance that the damage could escalate past the $20trn mark.

The lead author on the paper, Professor Simon Dietz, said: “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.”

The research showed that limiting global warming to 2C would see financial assets fall by $315bn less than the current 2.5C trajectory, including the costs of introducing technology to cut emissions.

Task force

The worrying figures comes as the ex-Mayor of New York, Michael Bloomberg’s newly established task force warned that climate risk information should form the foundation of companies’ annual and routine financial filings.

The first report since the task force was assembled in December stated that investor judgement was being clouded by a lack of standardised framework to disclose climate risk.

Writing in the report, Bloomberg said: “The absence of a standardised framework for disclosing climate-related risks makes it difficult for preparers to determine what information should be included in their financial filings and how it should be presented.

“The resulting fragmentation in their reporting practices has prevented investors, creditors and underwriters from accessing information that can inform their decisions.”

With companies like Peabody Energy – reportedly teetering on the edge of administration – and Exxon Mobil facing potential legal action over the alleged withdrawal of exposure information, the task force will spend the remainder of 2016 developing a new framework.

By 2017 it will aim to introduce a framework for climate disclosure that addresses issues over accuracy and consistency, as well as enforcing a sense of accountability into new information disclosures.

Commenting on the report, PwC’s financial services and climate change partner, Jon Williams said: “Given the scale of the climate change challenge that we face, and the profound economic impacts if we get it wrong, it’s vital that corporate organisations, as well as those institutions that finance them, clearly understand the risks involved and manage these effectively.

“The Taskforce’s stall has been clearly set out in this report, and there is much ground to cover over the next nine months if it is to deliver on its highly ambitious targets and embed climate-related risks firmly within the financial mainstream.

“This might seem a tall order but, as we’ve seen in the past, the financial services industry is hugely adept at successfully responding to significant market and regulatory challenges – it’s done it before and can do so again now.”

Investor confidence

The task force will hope that the new framework can rejuvenate the flailing confidence that investors have in relation to climate and energy policy.

CDP’s Carbon Action initiative has helped investors – worth $22trn in assets – reduce corporate carbon emissions by 641 million tonnes, highlighting the importance of readily available finance in tackling climate change.

But in the UK, the Treasury has stated that low investor confidence in the energy sector is more due to “staggering volatility” of energy prices than Government policy on low-carbon.

Matt Mace

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