$2.5tn of global financial assets at risk from climate change

The first estimate created using economic modelling has suggested that climate change could reduce the value of the world’s financial assets by $2.5tn (£1.7tn). Worst-case scenarios indicate that this could rise to $24tn or 17% of the world’s assets. Restricting global warming to the 2­°C agreed at COP21 would reduce this amount by $315bn, even after the costs of carbon cutting are taken into account. The losses would come from the destruction of assets through extreme weather events and a reduction in earnings. Ben Caldecott, the director of the sustainable finance programme at the University of Oxford, said that “Physical climate change impacts are a systemic risk on a massive scale.” Professor Simon Dietz, lead author of the study warned specifically of the risk to pension funds from climate change.

Climate change could cut the value of the world’s financial assets by $2.5tn (£1.7tn), according to the first estimate from economic modelling.

In the worst case scenarios, often used by regulators to check the financial health of companies and economies, the losses could soar to $24tn, or 17% of the world’s assets, and wreck the global economy.

The research also showed the financial sense in taking action to keep climate change under the 2C danger limit agreed by the world’s nations. In this scenario, the value of financial assets would fall by $315bn less, even when the costs of cutting emissions are included.

“Our work suggests to long-term investors that we would be better off in a low-carbon world,” said Prof Simon Dietz of the London School of Economics, the lead author of the study. “Pension funds should be getting on top of this issue, and many of them are.” He said, however, that awareness in the financial sector was low.

Mark Campanale of the thinktank Carbon Tracker Initiative said the actual financial losses from unchecked global warming could be higher than estimated by the financial model behind the new study. “It could be a lot worse. The loss of financial capital can be a lot higher and faster than the GDP losses [used to model the costs of climate change in the study]. Just look at value of coal giant Peabody Energy. It was worth billions just a few years ago and now it is worth nothing.”

The Bank of England and World Bank have warned of the risks to the global economy of climate change and the G20 has asked the international Financial Stability Board to investigate the issue. In January, the World Economic Forum said a catastrophe caused by climate change was the biggest potential threat to the global economy in 2016.

“Physical climate change impacts are a systemic risk on a massive scale,” said Ben Caldecott, the director of the sustainable finance programme at the University of Oxford. “Investors can do much more to differentiate between companies more or less exposed and they can help reduce the risk to the global economy by supporting ambitious action on climate change.”

The new study, published in the peer-reviewed journal Nature Climate Change, used economic modelling to estimate the impact of unchecked climate change. It found that in that scenario, the assets were effectively overvalued today by $2.5tn, but that there was a 1% chance that the overvaluation could be as high as $24tn.

A street in York, UK. Weather events triggered by climate change have a wide ranging impact on the wider economy. Photograph: Jeff J Mitchell/Getty Images

The losses would be caused by the direct destruction of assets by increasingly extreme weather events and also by a reduction in earnings for those affected by high temperatures, drought and other climate change impacts.

If action is taken to tackle climate change, the study found the financial losses would be reduced overall, but that other assets such as fossil fuel companies would lose value. Scientists have shown that most of the coal, oil and gas reserves such companies own will have stay in the ground if the global rise in temperature is to be kept under 2C. The total stock market capitalisation of fossil fuel companies today is about $5tn.

“There is no scenario in which the risk to financial assets are unaffected by climate change. That is just a fiction,” said Dietz. “There will be winners and losers.” 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.

Investors have also been warned about investing in new coal and gas fired power stations after 2017 by a second new study. The research shows that, to meet the 2C target, no new carbon-emitting power stations can be built anywhere in the world unless they are later closed down or retrofitted with carbon capture and storage technology.

“Investors putting money into new carbon-emitting infrastructure need to ask hard questions about how long those assets will operate for, and assess the risk of future shut-downs and write-offs,” said Prof Cameron Hepburn of the University of Oxford.