The EIU Report: The Cost of Inaction

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The cost of inaction: Recognising the value at risk from climate change is a report by The Economist Intelligence Unit (The EIU). The research depicts the scope of assets at risk from climate change from the present to 2100. This innovative achievement draws on a modeling endeavor that combines The EIU’s long-term forecasts with a nuanced, integrated assessment model provided by Vivid Economics. The full methodology is provided in the appendix to the report. This white paper further discusses the possible consequences of climate change as well as how both investors and governments are measuring and responding to climate-related risks. The findings of the paper are based on detailed modeling, extensive desk research and interviews with a range of experts, conducted by The EIU.

Key findings include:

  • The value at risk to manageable assets from climate change calculated in this report is $4.2 trillion, in present value terms.
  • The tail risks are more extreme; 6°C of warming could lead to a present value loss worth $13.8 trillion, using private-sector discount rates.
  • From the public-sector perspective, 6°C of warming represents present value losses worth $43 trillion—30% of the entire stock of the world’s manageable assets.
  • Impacts on future assets will come not merely through direct, physical harms but also from weaker growth and lower asset returns across the board. The interconnected nature of the problem will reduce returns, even on investments unharmed by physical damage.
  • Although direct damage will be more localized, indirect impacts will affect the entire global economy; accordingly, asset managers will face significant challenges diversifying out of assets affected by climate change. Institutional investors need to assess their climate-related risks and take steps to mitigate them; very few have begun to do this.
  • Regulation has largely failed to confront the risks associated with climate change borne by long-term institutional investors. To enable meaningful risk analyses, public companies should be required to disclose their emissions in a standardized and comparable form.
  • Carbon pricing is crucial to addressing climate change. Government inaction with respect to this market failure neglects an issue of systemic risk and global importance.

To avoid sleepwalking into a climate crisis, large-scale efforts are needed from both the public and the private sector. Moreover, to bolster effectiveness and avoid regulatory arbitrage, there is a clear need for coordinated action by national governments, institutional investors, regulatory bodies and international financial organizations. The UN Climate Change Conference (Conference of the Parties, or COP21) due to take place in Paris at the end of this year offers a major forum for governments to address this market failure and to chart a path towards mitigating climate change. If there are no strong commitments to reduce greenhouse gas emissions and meaningful actions to price carbon, then this historic opportunity will have been wasted.

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