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The $24-trillion impact

JINOY JOSE P | Updated on January 20, 2018 Published on April 20, 2016

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That could be about ₹1,600 lakh crore in our humble currency! What’re we talking about here?

That’s the total amount of financial asset losses scientists are expecting from climate change if we don’t do enough to mitigate the impact — the so-called worst-case scenario. A new study, which has mapped the impact of 21st century climate change on the current market value of global financial assets, shows the weather event could easily and immediately make the world’s financial assets slimmer by $2.5 trillion.

Mind-boggling!

You bet! The new research has reiterated — like many others have done — the fact that environmental damage and economic impact share an umbilical relationship. And it makes perfect financial sense to take concerted action to keep climate change under the 2°C warming target the world’s nations had agreed upon.

Tell me more about the study.

It has been published in Nature Climate Change. Here, the scientists used an economic model to estimate impacts of unchecked climate change. The study is important for its focus on financial assets.

Yes, the authors agree that investors and financial regulators are increasingly aware of climate-change risks. That said, most of the attention has so far been on whether controls on carbon emissions will impact assets of fossil-fuel companies. But the authors felt it is no less important to ask what might be the impact of climate change itself on asset values.

Interesting!

Minus the jargon, the study basically tells investors that a low-carbon world is the best bet we have in terms of safeguarding our financial assets. Granted, many of them — such as some pension funds — are already at it, but the authors of the study feel awareness about climate change is low in the financial sector, and it’s time this changed.

Fine, but can you please elaborate on how exactly these losses happen?

Well, the losses would be caused by the direct destruction of assets courtesy extreme weather events — which are on the rise — and also by a reduction in earnings for those affected by high temperatures, drought and other climate change impacts.

Okay, how accurate are the numbers?

In fact, researchers say the actual financial losses from “unchecked global warming” could be higher than estimated by the model of the study. The capital loss can be a lot higher and faster than the GDP losses. For instance, they cite the market value Peabody Energy, the world’s largest private-sector coal company based in the US. It was worth billions just a few years ago and now it is worth almost “nothing”.

Then why is the world of finance not taking serious note of this?

To be fair, there are some efforts on the way. Recently, the Bank of England and World Bank have warned of the risks climate change has been posing to the global economy. The G20 has asked the International Financial Stability Board to look into this. This January, the World Economic Forum said a catastrophe caused by climate change was the biggest potential threat to the global economy in 2016. But...

…What?

The real push should come from investors. Experts say physical climate change impacts are a systemic risk on a massive scale. Investors must be really picky when it comes to selecting companies and demanding their support for action on climate change.

Major investors such as Norway’s sovereign wealth fund — the world’s biggest — have already begun selling off high-carbon stocks such as coal companies. But there is a long way to tread. The total stock market capitalisation of fossil fuel companies stands at about $5 trillion today.

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Published on April 20, 2016
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