Environmentalists aren’t the only ones fretting over climate change. A new study has calculated the risk to financial markets if temperatures are allowed to rise uninhibited. Inaction, it said, would be a bad investment.
A fresh study by the Cambridge Institute for Sustainable Leadership has put a price tag on climate change mitigation. Investment portfolios primarily made up of stocks could lose nearly half of their value if global warming isn’t curbed.
By contrast, if the Earth’s temperature is prevented from rising more than 2 degrees above pre-industrial levels, global GDP could be 20 percent higher in 2050 than it is now, according to the study, which was released on Thursday.
With the next United Nations Climate Conference less than three weeks away, the study was one of the first of its kind to primarily focus on the effect global warming has on financial markets.
The researchers stress-tested financial portfolios, simulating market shocks generated by different climate change scenarios.
Short-term costs, long-term benefits
The study posits that radical political measures to mitigate climate change would initially have a negative impact on the real economy and the financial sector. Yet, in the long term, global economic output would benefit from limiting global warming to two degrees Celsius above pre industrial levels.
If the two-degree target is reached, global GDP could be more than 20 percent higher by 2050, compared to a scenario where no political action is taken and the use of fossil fuels increases, the study found.
Financial investors face serious challenges in the five years leading up to 2020. Investment portfolios consisting mainly of stocks are at risk of losing up to 45 percent of their value if no political action is taken to combat climate change and fossil fuel use continues to increase, with the markets in the developing world hit hardest.
By contrast, if radical political actions were taken to limit climate change to two percent, the scientists also expect portfolio values to plummet initially, but never by more than 15 percent. In addition, they expect markets to recover much faster.
A call for action
According to the study, investors could avoid half of these risks by restructuring their portfolios. Early movers would have an advantage by shifting their capital to investments in industries and countries less likely to be effected by climate change. But this still leaves half of the risks associated with climate change unable to be hedged. These risks affect the entire market, the researchers say.
Scott Kelly, one of the authors, sees the study as yet another reason for policy makers to commit to drastic measures at the upcoming UN climate conference in Paris.
“Our key messages are that the risk of climate change are real and that the investment community needs to take these risks into consideration,” Kelly told DW.
“One of the key risk factors of climate change is that the longer we wait to make the transition, the higher the cost is going to be,” Kelly added. “What the financial markets and businesses want to see is an orderly transition to a low carbon future.”
“The greatest market failure the world has ever seen”
The findings of Kelly and his colleagues are largely in line with other studies on the economic impact of climate change. Nicholas Stern published a widely discussed report in 2006 that argued that climate change was “the greatest market failure the world has ever seen.”
Stern, a former chief economist at the World Bank, found that the benefits of strong and early action against climate change would clearly outweigh the economic costs of not acting. More recently, Stern has argued that political action would be even more urgent than his report initially stated.
In July of this year, two scholars from the London School of Economics published a study arguing that the benefits of preventing climate change were larger than the drawbacks – not just on a global scale but also for individual countries, pushing against the common view of climate change as a “tragedy of the commons”.
In a speech in September, the governor of the Bank of England, Mark Carney, called climate change a significant threat to financial stability, arguing that, among other things, the costs of weather-related insurance claims had risen dramatically since the 1980s. “The challenges currently posed by climate change pale in significance compared with what might come,” Carney stated.