The issue of climate change continues to prevail; right now, it’s posing a huge threat not just to the US financial sector but to the global economy as well.
Indeed, climate change has impacted the global economy in multiple ways. First, the number of deadly natural disasters went up; in fact, 2017 and 2018 were the years with the biggest economic losses due to deadly natural disasters. Second, the physical damage brought on by such disasters started repricing asset classes.
The real estate market along coastlines is one such example — when disasters hit, the market saw physical damage and repricing due to the threats of the environment. People would move away, building projects would be restricted, insurers might not show support for the projects, and so on.
In the US alone, $900 billion homes would literally (and financially) be underwater if the sea levels rise by just 6 feet by 2100. That was according to the November report released by the Center for American Progress (CAP).
Because of the looming threat of climate change, governments were expected to address the issue by tightening climate policies. However, this could lead to fossil fuel companies losing $2.3 trillion. According to the Principles for Responsible Investment (PRI), by 2025, there would be a policy response to climate change that’s abrupt, disorderly, and forceful. The group added that if the government hadn’t delayed actions, the energy transition could have been smoother.
Adam Tooze, a historian, said that up to $4 trillion in energy assets would be stranded; in the broader industrial sector, $20 trillion of its market value could be wiped out.
As of now, governments continue with small reforms — hence why there were still investments pouring into sectors that are at risk due to climate change. Therefore, when natural disasters strike and massive re-pricing of assets occur, it could result in a financial meltdown with trillions of dollars lost.