Skip to main content

Thank you for visiting nature.com. You are using a browser version with limited support for CSS. To obtain the best experience, we recommend you use a more up to date browser (or turn off compatibility mode in Internet Explorer). In the meantime, to ensure continued support, we are displaying the site without styles and JavaScript.

‘Climate value at risk’ of global financial assets

Nature Climate Change volume 6, pages 676–679 (2016)Cite this article

Subjects

This article has been updated

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.

This is a preview of subscription content, access via your institution

Relevant articles

Open Access articles citing this article.

Access options

Rent or buy this article

Get just this article for as long as you need it

$39.95

Learn more

Prices may be subject to local taxes which are calculated during checkout

Figure 1: The impact of climate change on discounted cash flows from the stock of global financial assets.
Figure 2: The cumulative distribution function of the difference, in per cent, between the present value of global financial assets between mitigation to 2 °C and business as usual.

Change history

  • 13 April 2016

    In the version of this Letter originally published, a reference was mistakenly omitted. The new reference 15 — The Cost of Inaction: Recognising the Value at Risk from Climate Change (Economist Intelligence Unit, 2015) — is now cited in the sixth paragraph and subsequent references have been renumbered in all versions of the Letter.

References

  1. McGlade, C. & Ekins, P. The geographical distribution of fossil fuels unused when limiting global warming to 2 °C. Nature 517, 187–190 (2015).

    Article  CAS  Google Scholar 

  2. Carbon Tracker & Grantham Research Institute on Climate Change and the Environment Unburnable Carbon 2013: Wasted Capital and Stranded Assets (Carbon Tracker, 2013).

  3. Arent, D. J. et al. in Climate Change 2014: Impacts, Adaptation, and Vulnerability. Part A: Global and Sectoral Aspects (eds Field, C. B. et al.) (Cambridge Univ. Press, 2014).

    Google Scholar 

  4. Stern, N. The Economics of Climate Change: The Stern Review (Cambridge Univ. Press, 2007).

    Book  Google Scholar 

  5. Weitzman, M. L. GHG targets as insurance against catastrophic climate damages. J. Pub. Econ. Theory 14, 221–244 (2012).

    Article  Google Scholar 

  6. Burke, M. B., Hsiang, S. M. & Miguel, E. Global non-linear effect of temperature on economic production. Nature 527, 235–239 (2015).

    Article  CAS  Google Scholar 

  7. IPCC Managing the Risks of Extreme Events and Disasters to Advance Climate Change Adaptation. A Special Report of Working Groups I and II of the Intergovernmental Panel on Climate Change (Cambridge Univ. Press, 2012).

  8. Stern, N. The structure of economic modeling of the potential impacts of climate change: grafting gross underestimation of risk onto already narrow science models. J. Econ. Lit. 51, 838–859 (2013).

    Article  Google Scholar 

  9. Graff Zivin, J. & Neidell, M. Temperature and the allocation of time: implications for climate change. J. Labor Econ. 32, 1–26 (2014).

    Article  Google Scholar 

  10. Climate Change Scenarios: Implications for Strategic Asset Allocation (Mercer, 2011).

  11. Open letter to Finance Ministers in the Group of Seven (G-7) (Institutional Investors Group on Climate Change, 2015).

  12. Carney, M. Breaking the Tragedy of the Horizon: Climate Change and Financial Stability (Bank of England, 2015).

    Google Scholar 

  13. Integrating Risks into the Financial System: The 1-in-100 Initiative Action Statement (United Nations, 2014).

  14. Campbell, J. Y. & Viceira, L. M. Strategic Asset Allocation: Portfolio Choice for Long-Term Investors (Oxford Univ. Press, 2014).

    Google Scholar 

  15. The Cost of Inaction: Recognising the Value at Risk from Climate Change (Economist Intelligence Unit, 2015).

  16. Covington, H. & Thamotheram, R. The Case for Forceful Stewardship Part 1: The Financial Risk from Global Warming (2015).

    Google Scholar 

  17. Kaldor, N. A model of economic growth. Econ. J. 67, 591–624 (1957).

    Article  Google Scholar 

  18. Gollin, D. Getting Income Shares Right. J. Polit. Econ. 110, 458–474 (2002).

    Article  Google Scholar 

  19. Modigliani, F. & Miller, M. The cost of capital, corporation finance and the theory of investment. Am. Econ. Rev. 48, 261–297 (1958).

    Google Scholar 

  20. Modigliani, F. & Miller, M. Corporate income taxes and the cost of capital: a correction. Am. Econ. Rev. 53, 433–443 (1963).

    Google Scholar 

  21. Arrow, K. J. et al. How should benefits and costs be discounted in an intergenerational context? Rev. Environ. Econ. Policy 8, 145–163 (2014).

    Article  Google Scholar 

  22. Nordhaus, W. D. A Question of Balance: Weighing the Options on Global Warming Policies (Yale Univ. Press, 2008).

    Google Scholar 

  23. Dietz, S. & Stern, N. Endogenous growth, convexity of damages and climate risk: how Nordhaus’ framework supports deep cuts in carbon emissions. Econ. J. 125, 574–602 (2015).

    Article  Google Scholar 

  24. Moyer, E., Woolley, M., Glotter, M. & Weisbach, D. A. Climate impacts on economic growth as drivers of uncertainty in the social cost of carbon. J. Legal Stud. 43, 401–425 (2014).

    Article  Google Scholar 

  25. Anderson, B., Borgonovo, E., Galeotti, M. & Roson, R. Uncertainty in climate change modeling: can global sensitivity analysis be of help? Risk Anal. 34, 271–293 (2014).

    Article  Google Scholar 

  26. Dietz, S. & Asheim, G. B. Climate policy under sustainable discounted utilitarianism. J. Environ. Econ. Manage. 63, 321–335 (2012).

    Article  Google Scholar 

  27. Global Shadow Banking Monitoring Report 2014 (Financial Stability Board, 2014).

  28. Fossil Fuel Divestment: A US$5 trillion Challenge (Bloomberg New Energy Finance, 2014); http://about.bnef.com/content/uploads/sites/4/2014/08/BNEF

  29. Shiller, R. J. Do stock prices move too much to be justified by subsequent changes in dividends? Am. Econ. Rev. 71, 421–436 (1981).

    Google Scholar 

  30. CISL Unhedgeable Risk: How Climate Change Sentiment Impacts Investment (Cambridge Institute for Sustainability Leadership, 2015).

  31. Dimson, E., Marsh, P. & Staunton, M. Equity Premiums Around the World (CFA Institute, 2011).

    Google Scholar 

  32. Maddison, A. The World Economy: A Millennial Perspective (Development Centre of the OECD, 2006).

    Book  Google Scholar 

  33. Global Financial Stability Report 2011 (IMF, 2011).

  34. Nordhaus, W. D. RICE-2010 and DICE-2010 Models (2012); http://www.econ.yale.edu/∼nordhaus/homepage/RICEmodels.htm

  35. Nordhaus, W. D. & Boyer, J. Warming the World: Economic Models of Global Warming (MIT, 2000).

    Book  Google Scholar 

  36. Dietz, S., Gollier, C. & Kessler, L. The Climate Beta (Centre for Climate Change Economics and Policy Working Paper 215 and Grantham Research Institute on Climate Change and the Environment, 2015).

    Google Scholar 

  37. IPCC Climate Change 2013: The Physical Science Basis (IPCC, 2013).

Download references

Acknowledgements

S.D. and A.B. would like to acknowledge the support of the UK’s Economic and Social Research Council (ESRC), and the Grantham Foundation for the Protection of the Environment. We are grateful for the invaluable advice of H. Covington and S. Waygood.

Author information

Authors and Affiliations

  1. London School of Economics and Political Science, ESRC Centre for Climate Change Economics and Policy and Grantham Research Institute on Climate Change and the Environment, Houghton Street, London WC2A 2AE, UK

    Simon Dietz & Alex Bowen

  2. Vivid Economics Ltd, Evergreen House North, 160 Euston Road, Grafton Place, London NW1 2DX, UK

    Simon Dietz, Charlie Dixon & Philip Gradwell

Authors
  1. Simon Dietz
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Alex Bowen
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Charlie Dixon
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Philip Gradwell
    View author publications

    You can also search for this author in PubMed Google Scholar

Contributions

S.D. led the project, from research design through modelling to writing the manuscript. A.B. helped design the research and draft the manuscript. P.G. helped design the research and run the model. C.D. also helped run the model.

Corresponding author

Correspondence to Simon Dietz.

Ethics declarations

Competing interests

No competing financial interests have affected the conduct or results of this research. However, for the sake of transparency, the authors would like to make clear that they were employed by Vivid Economics Ltd during the production of this research. Vivid Economics Ltd is a London-based economics consultancy. Neither the authors nor the company stands to profit directly from this research.

Supplementary information

Supplementary Information

Supplementary Information (PDF 519 kb)

Rights and permissions

Reprints and Permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Dietz, S., Bowen, A., Dixon, C. et al. ‘Climate value at risk’ of global financial assets. Nature Clim Change 6, 676–679 (2016). https://doi.org/10.1038/nclimate2972

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1038/nclimate2972

This article is cited by

Search

Advanced search

Quick links

Nature Briefing

Sign up for the Nature Briefing newsletter — what matters in science, free to your inbox daily.

Get the most important science stories of the day, free in your inbox. Sign up for Nature Briefing