Climate change could threaten trillions of dollars of financial assets, a new study reports

New research from the London School of Economics estimates that a broad range of global stocks and other financial assets are overvalued because investment managers don’t take the risks of climate change into account.

The LSE research estimates financial assets worldwide are presently overvalued by $2.5 trillion — and, in the worst case, $24 trillion.

Massive climate-related writedowns are not far off in the future, which would mean huge losses for investors who ignore the risks, says Alex Bowen of the Grantham Research Institute on Climate Change at LSE and co-author of the new study, published in Nature Climate Change.

Bowen says the researchers basically wanted to ask, "What would happen had participants in financial markets gone to sleep one night as complete climate skeptics, woken up the next morning and realized the current state of climate science? What impact would that have on the value of financial assets at that moment?"

The median projection is a loss of $2.5 trillion. But if asset managers “came to believe that some of the uncertainties in climate science were going to be resolved towards the pessimistic end of the spectrum, they would mark down their assets as soon as they had that information,” Bowen says.

Put another way, when financial managers wake up to the risks of climate change, financial markets could experience a phenomenal sell-off — that is, people wanting to get rid of certain assets while they could still get something for them. The markets could lose $2.5 trillion dollars overnight, or 10 times that if investors suddenly became very pessimistic.

These losses to financial assets could happen today, tomorrow — “basically, as soon as people active in financial markets change their view of what's going to happen over the next 100 years or so,” Bowen says.

“It may be that some of this ‘value at risk,’ as it’s called, is already reflected in the current market valuations,” Bowen concedes. “But it's remarkable how many investment managers haven't actually looked at issues such as the prospects of fossil fuel companies in a carbon-constrained world. It's amazing how many people still doubt the climate science.”

Bowen urges people who own or manage wealth to look at the evolving states of climate science and climate economics.

“Keep an eye on whether scientists, for instance, begin to find that the climate is more sensitive to greenhouse gas emissions than they previously thought,” he says. “We might get good news on that front; I'm not saying we're definitely going to see the pessimistic outcomes. But it’s surely very important for wealth managers to keep an eye on this kind of thing, because it could have a very big impact on their portfolios, They need to look at some of the sectors like agribusiness, which would be particularly badly affected if climate change began to run away from us.”

This article is based on an interview that aired on PRI's Living on Earth with Steve Curwood.