“Tragedy of the Horizon”: The Economic Impact of Climate Change

When many people think of climate change, they usually picture polar bears stranded on ice, video clips of extreme weather conditions somewhere miles away from your house, or footage of politicians talking about how it’s the critical debate of our time (or one of the world’s biggest scams). If you think about it long enough, your thoughts may even wander to your own energy or utilities provider, wondering what they are doing about it. But what you don’t think about is banks or insurance companies. And I don’t mean the kind of insurance that protects your house from bushfires or floods. I’m talking about your investment portfolio, or those of the companies who invest your money.

 

In 2015, Bank of England Governor Mark Carney warned in a speech to Lloyd’s of London about the “Tragedy of the Horizon,” his term for global risk arising from the inherent disparity between the short-term thinking of financial markets and the long-term nature of climate. Companies concerned with pressing challenges, he suggested, may not be accurately disclosing to investors the risks they face due to climate change.

 

To test Carney’s hunch, Allie Goldstein of the environmental organisation Conservation International and colleagues took the voluntary disclosures made in 2016 by more than 1,600 large companies worldwide and compared the risk estimates within to estimates from scientists and economists. According to their findings, most companies expect climate change will increase their operational costs and reduce or disrupt production capacity due to events such as floods, drought or hurricane damage. And awareness is growing rapidly: The number of companies seeing such risks as either “virtually certain” or “more likely than not” to occur has doubled since 2011. Yet serious complacency persists.

global-risks-2019-1global-risks-2019-2

Economists have used so-called integrated assessment models, which combine economic and climate models, to make crude estimates of the likely costs that will be incurred dealing with the physical aspects of climate change. Through 2100, this approach leads to figures varying from around $2 trillion to $20 trillion, or 2 to 20 percent of current total financial assets. Independently, the Intelligence Unit of the Economist estimated a possible loss of 30 percent of the entire stock of manageable assets. In striking contrast, Goldstein and colleagues found, companies estimate their financial risk only in the tens of billions of dollars. That’s an alarming 100 times smaller than even the most conservative scientific estimate.

 

It’s important to remember that integrated assessment models have themselves been heavily criticized for being inherently conservative, and they probably underestimate the likely costs by quite a lot. So it seems that firms as a group are not even coming close to providing realistic views. Or they’re not faithfully reporting the risks they already see, perhaps believing the truth could turn investors away.

 

Screenshot 2019-06-10 at 17.52.22

 

For a more detailed look at the economic impact of climate change read this [114 page] 2019 report from World Economic Forum in partnership with Marsh & McLennan and Zurich Insurance Group.

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