Between $2.5 trillion and $24.2 trillion of global financial assets could be at risk due to climate change.

According to a new study published in Nature Climate Change, implementing policies to prevent temperatures rising by more than 2°C above pre-industrial levels substantially reduces this risk.

Previous research has shown that bringing in stringent climate policies, which limit emissions and pollution, may ‘strand’ some assets that contribute to climate change, such as oil, coal and gas reserves, because the climate policies dictate that the assets cannot be used, so the assets lose value.

Increased climate variability can directly destroy capital assets, for example through damage from extreme weather events, or it can reduce the productivity of these assets, thereby reducing their value.

However, very little work has been done to estimate the direct impact of climate change on the value of financial assets themselves.

Economic and Social Research Council (ESRC) analyst Simon Dietz and colleagues have now modelled the impact of climate change on global economic growth and the value of global financial assets.

They find that, if a business-as-usual emissions path is maintained, 1.8 per cent of the present market value of financial assets is at risk, which is equivalent to about $2.5 trillion dollars or half of the estimated current total stock market value of fossil-fuel companies.

However, the authors find that if climate change is worse than expected, up to $25 trillion of assets could be at risk.

In an accompanying article, Sabine Fuss writes: “clearly, such massive losses, even at a lower probability of occurring, would be hugely disruptive, so investors should be taking climate risks seriously.”

The full study is available here.