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Climate Change Could Wipe Out Assets Worth More Than The Economy Of Brazil

April 2016

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For years now, concern has been growing among investors that the regulatory response to climate change poses a threat to some of the world’s biggest companies and their assets, particularly fossil fuels that have yet to be pulled from the ground. But a new study suggests that the impacts of climate change put up to $25 trillion worth of other assets at risk.

The report from Simon Dietz and colleagues at the London School of Economics and Political Science in the journal Nature Climate Change attempts to put some data behind that other side of the argument — that regulations to limit the amount of climate change-contributing carbon put into the atmosphere help to preserve trillions of dollars worth of assets.

Using models for the impact of climate change on global economic growth and the value of financial assets worldwide, the research finds that at least $2.5 trillion dollars, which equals about half the estimated total stock market value of fossil-fuel companies, is at risk. The report defines this risk as either the potential for impacts like extreme weather associated with climate change to destroy capital assets, or to reduce their productivity.

As with most discussions of data and climate change, however, the potential impacts are calculated across a range of possibilities. The study authors find that something more like a worst-case climate change impacts scenario could put up to $25 trillion at risk.

In the report, Dietz argues therefore that meeting targets to limit global warming to no more than 2 degrees celsius would actually mean a .2 percent increase in the value of global financial assets, including the cost of mitigation, compared to a “business-as-usual” scenario.

“Limiting warming to no more than 2 °C makes financial sense to risk-neutral investors—and even more so to the risk averse,” the study reads. 

All these calculations are based upon the so-called “DICE2010″ model that is widely used to calculate the potential economic damages from climate change. While the model is accepted and used by agencies including the U.S. Environmental Protection Agency, it is not without its critics.

While the data can and surely will be parsed endlessly by others, Dietz is right to suggest that investors are beginning to pay attention to the potential portfolio impacts of climate change beyond just the notion of unextracted fossil fuels.

Last year, the Blackrock Investment Institute put out a report titled: “The Price of Climate Change: Global Warming’s Impact on Portfolios” (PDF - 836KB) that touches on “stranded assets,” but also looks at investment strategies like “green bonds” that finance projects to reduce carbon emissions, thereby investing in preserving the assets Dietz suggests are at risk.


 

This article was written by Eric Mack from Forbes. This reprint is supplied by BNY Mellon under license from NewsCred, Inc.

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