The Data Says Climate Change Could Cost Investors Trillions

An important new study, published in the journal Nature Climate Change, says that climate change will be expensive. Extremely expensive. It turns out that if you mess with the planet’s thermostat, it’s not great for the economy or investments. Forget the polar bears; your pension and retirement funds are in trouble.

If we stay on the current emissions path, the study predicts, the value at risk in global portfolios could range from about $2 trillion to $25 trillion. Estimates of climate risk in the trillions are unfortunately getting more common. Last year, Citi produced a powerful study of the costs and benefits of shifting the energy system toward low-carbon technologies. Unchecked climate change, Citi said, could cost the world $72 trillion by the middle of the century. But the big surprise in Citi’s report was the cost of building the low-carbon economy: the world can spend $2 trillion less in total on energy infrastructure and ongoing fuel costs than it would in the business-as-usual scenario. So we save $2 trillion and avoid losing up to $72 trillion in economic activity.

When investors look at climate risk – if they do at all – they’ve focused mainly on what worldwide action to reduce carbon will do to the fossil fuel industry. Holding global warming to 2-degrees Celsius will require keeping huge quantities of fossil fuels in the ground. These so-called “stranded assets,” sitting on petro-company balance sheets, are essentially worthless. And thus those companies are massively overvalued. The stranded assets argument sounds (financially) scary, but it hasn’t been quite enough to truly shift capital flows toward the clean economy. This new research, by saying that climate change is a threat to all assets, could get a much broader coalition of investors moving.

It’s not just the investment community that should rethink where its capital goes. Any large company needs to take a hard look as well. For example, do you or your suppliers have significant coastal assets? Where are your financial assets invested and in what classes? Do you have significant exposure to coal or fossil fuel holdings? What opportunities might arise for you from a popping carbon bubble? Putting a value on the risk or opportunity is an important first step to make it all understandable to business and will certainly help stir the souls (or wallets) of the investor community.

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