New research estimates that the impacts of climate change could put trillions of dollars worth of financial assets at risk by 2100.
The report, led by climate economists from the London School of Economics and Political Science, found that rising temperatures and disruption caused by related droughts, floods and heat waves will likely slow global economic growth and damage the performance of stocks and bonds.
For instance, if warming reaches 2.5 degrees Celsius over pre-Industrial Revolution levels by 2100, investments worth some $2.5 trillion may be in danger. This, researchers warn, is equal to half the current estimated stock market value of fossil fuel companies.
However, if that rise were limited to two degrees Celsius - a goal set by the world's leaders at the global climate summit in Paris last December - the value of assets at risk would be $1.7 trillion.
"Limiting warming to no more than two degrees Celsius makes financial sense to risk-neutral investors - and even more so to the risk averse," the authors wrote in their study.
Global regulators from the Financial Stability Board (FSB) estimate the world's current non-bank financial assets are worth $143 trillion. Therefore, the researchers' worst-case warming scenario predicted that as much as $24 trillion in financial assets could be compromised.
What's more is that based on current greenhouse gas emission trends, scientists warn the world could experience a warming upwards of four degrees Celsius.
"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 two degree Celsius," explained Simon Dietz, study co-author from the Grantham Research Institute on Climate Change. "This means risk-neutral investors would choose to cut emissions, and risk-averse investors would be even more keen to do so."
While previous research has focused on how oil, coal and gas investments may be impacted if the world reduces its use of fossil fuels in favor of sustainable energy, the new study provides the first-ever estimate of how climate change could directly impact the value of financial assets themselves.
"This undermines both the need for full disclosure so that climate risks can be assessed and portfolios adjusted accordingly, and the need for more research to develop comprehensive estimates of the risk of such losses," added Sabine Fuss of the Mercator Research Institute on Global Commons and Climate Change in Berlin.
The study was recently published in the journal Nature Climate Change.
