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‘Climate value at risk’ of global financial assets

Dietz, Simon and Bowen, Alex and Dixon, Charlie and Gradwell, Philip (2016) ‘Climate value at risk’ of global financial assets. Nature Climate Change, 6. pp. 676-679. ISSN 1758-678X

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Identification Number: 10.1038/nclimate2972

Abstract

Investors and financial regulators are increasingly aware of climate-change risks. So far, most of the attention has fallen on whether controls on carbon emissions will strand the assets of fossil-fuel companies1, 2. However, it is no less important to ask, what might be the impact of climate change itself on asset values? Here we show how a leading integrated assessment model can be used to estimate the impact of twenty-first-century climate change on the present market value of global financial assets. We find that the expected ‘climate value at risk’ (climate VaR) of global financial assets today is 1.8% along a business-as-usual emissions path. Taking a representative estimate of global financial assets, this amounts to US$2.5 trillion. However, much of the risk is in the tail. For example, the 99th percentile climate VaR is 16.9%, or US$24.2 trillion. These estimates would constitute a substantial write-down in the fundamental value of financial assets. Cutting emissions to limit warming to no more than 2 °C reduces the climate VaR by an expected 0.6 percentage points, and the 99th percentile reduction is 7.7 percentage points. Including mitigation costs, the present value of global financial assets is an expected 0.2% higher when warming is limited to no more than 2 °C, compared with business as usual. The 99th percentile is 9.1% higher. Limiting warming to no more than 2 °C makes financial sense to risk-neutral investors—and even more so to the risk averse.

Item Type: Article
Official URL: http://www.nature.com/nclimate/index.html
Additional Information: © 2016 Macmillan Publishers Limited
Subjects: G Geography. Anthropology. Recreation > GE Environmental Sciences
H Social Sciences > HG Finance
Sets: Research centres and groups > Grantham Research Institute on Climate Change and the Environment
Date Deposited: 26 Apr 2016 12:17
Last Modified: 22 Sep 2017 13:20
Projects: ES/K006576/1
Funders: Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/66226

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