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The world is reeling from record-breaking heatwaves, wildfires, and rainfall. The costs of inaction on global warming are potentially vast. But they're often not sufficiently factored in to asset valuations. The big danger is the climate Minsky moment, the term named after US economist Hyman Minsky for a sudden correction in asset valuations as investors simultaneously realise those valuations are unsustainable.
Agriculture is among the most vulnerable sectors. Research last year from Morgan Stanley suggests droughts and water scarcity could have a severe impact on key crops from wheat to soybeans. It estimated climate-change-induced disasters could put at least $314bn of annual production in jeopardy. Such disasters could also have a significant effect on industry.
Around a fifth of computer and electronics factories in Asia are in flood-prone areas, according to Moody's. When it comes to manufacturers' exposure to climate hazards, heat stress is the leading concern followed by water stress, wildfires, and flooding.
Meanwhile, recently published research suggested that the market is overvaluing US residential properties exposed to flood risk by between $121bn and $237bn. Globally by 2050, as many as 1.2bn people could be uprooted by climate change.
But despite such forecasts, many financial models omit climate change factors that could make economic outcomes far worse than predicted. Many assume that climate change does not slow gross domestic product growth. Climate tipping points such as thawing permafrost or an ocean circulation collapse are rarely included. More fundamentally, many base predictions on past data, which can be an unreliable guide to the future.
A new report takes a different approach, working backwards from an as-yet-undefined temperature at which the world's economy would plausibly cease to function. The report's authors suggest that half the world's GDP could be wiped out as early as 2070. In short, as well as tallying the costs involved in a serious response to climate change, investors need to start counting the considerable costs of inaction.
