Global warming threatens $13.2tr world’s assets

An average of $2.5 trillion, or 1.8 per cent, of the world’s financial assets will be at risk from the impacts of climate change if global mean surface temperature rises by 2.5°C (4.5°F) above its pre-industrial level by 2100, according to a new study by researchers.

The report found that uncertainties in estimating the ‘climate value at risk’ mean that there is a one per cent chance that warming of 2.5°C could threaten $24 trillion, or 16.9 per cent, of global financial assets in 2100.

The authors point out that these sums are larger than the estimates of $5 trillion for the total stock market capitalisation of fossil fuel companies today.

The document by Simon Dietz, Alex Bowen, Charlie Dixon and Philip Gradwell at the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science and Vivid Economics, will be published today in the journal Nature Climate Change.

“Limiting warming to 2°C (3.6°F) in 2100 would significantly reduce the ‘climate Value at Risk,’ the researchers found. The average value of global financial assets at risk would be US$1.7 trillion, with 1 per cent chance of US$13.2 trillion being at risk,” says the lead author on the paper, Prof. Dietz

In Nigeria, a study conducted by Ibadan-based environment group, Nigerian Environmental Study/Action Team (NEST), shows the vulnerability of various sectors of the Nigerian economy such as human settlements and health; water resources, wetlands, and freshwater ecosystems; energy, industry, commerce, and financial services; agriculture, food security, land degradation, forestry, and biodiversity; and coastal zone and marine ecosystems.

“The impact of climate change can be vast. In Nigeria, this means that some stable ecosystems such as the Sahel Savanna may become vulnerable because warming will reinforce existing patterns of water scarcity and increasing the risk of drought in Nigeria and indeed most countries in West Africa. As well, the country’s aquatic ecosystems, wetlands and other habitats will create overwhelming problems for an already impoverished populace.”
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The authors discovered that even when they factored in the costs of reducing greenhouse gas emissions to limit warming to 2°C, the average value of global financial assets would be $315 billion, or 0.2 percentage points, higher than if warming of 2.5°C by 2100 occurred along a ‘business as usual’ pathway for global emissions.

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.

“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.”

He added: “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.”

Dietz also drew attention to 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.”