Climate Value at Risk of Global Financial Assets

How will climate risks affect asset values by 2100?

The Climate Value at Risk of Global Financial Assets article by Simon Dietz, Alex Bowen, Charlie Dixon and Phillip Gradwell aims to quantify the impact of climate change on global financial assets.

The authors use an extended version of the DICE integrated assessment model, incorporating Monte Carlo simulations to account for key uncertainties in productivity growth, climate sensitivity, damage function, and abatement costs.

Their key results and implications include:

• The expected Climate Value at Risk (VaR) of global financial assets is 1.8% under a business-as-usual emissions scenario, equivalent to $2.5 trillion.The expected Climate Value at Risk (VaR) of global financial assets is 1.8% under a business-as-usual emissions scenario, equivalent to $2.5 trillion.
• The tail risk is significant, with the 99th percentile climate VaR at 16.9% ($24.2 trillion).The tail risk is significant, with the 99th percentile climate VaR at 16.9% ($24.2 trillion).
• Limiting warming to 2°C reduces the expected climate VaR by 0.6% and the 99th percentile by 7.7%.Limiting warming to 2°C reduces the expected climate VaR by 0.6% and the 99th percentile by 7.7%.
• Including mitigation costs, the present value of global financial assets is an expected 0.2% higher when limiting warming to 2°C compared to business-as-usual.Including mitigation costs, the present value of global financial assets is an expected 0.2% higher when limiting warming to 2°C compared to business-as-usual.
• The majority of climate VaR arises in the second half of the 21st century, making results sensitive to discount rates.The majority of climate VaR arises in the second half of the 21st century, making results sensitive to discount rates.

Given the potential for significant financial losses in a business-as-usual scenario, policymakers may leverage these results to justify stronger climate mitigation policies. The long time horizon, sensitivity to discount rates, and focus on global estimates may limit the results' applicability.Given the potential for significant financial losses in a business-as-usual scenario, policymakers may leverage these results to justify stronger climate mitigation policies. The long time horizon, sensitivity to discount rates, and focus on global estimates may limit the results' applicability.