Former Liberal leader John Hewson says the next global recession could be caused by climate change.

Hewson, who is now Professorial Fellow in economics at the Australian National University, has been in charge of surveying global companies on their climate change risk and management.

As chair of the Asset Owners Disclosure Project, he says he has seen the rise of some very worrying factors.

“In our work, only 7 per cent of the top 500 asset owners of the world of our last year's survey could actually measure the climate risks that they were running. And only about 1.5 per cent actually had a strategy for managing those risks,” Professor Hewson said this week.

“In my view, financial markets consistently underprice risk. They don't particularly understand it and they underprice it.”

He said future risks include:

  • climate change-related disaster physically harming company assets
  • Government policies to mitigate climate change that could shift the investment landscape
  • radical changes to the economic order from any new technology to address climate change

“Some combination of those three could easily precipitate a financial crisis, which sees the value of many assets fall,” Professor Hewson said.

He said the market barely understood the scale of the risk it was exposed to.

“The stock market has reacted to some extent but nowhere near enough. We're not recognising the extent of the risk being run by major financial institutions, in particular pension and superannuation funds,” he said.

He even tied superannuation into the mix, saying its constant growth and mandatory contributions could spin out to all areas of the economy.

“There are also systemic risks because the linkages across various types of institutions and financial markets and so on are very significant and are not well understood,” he said.

Some of the issues Professor Hewson raises are backed by a new report.

Researchers at the London School of Economics (LSE) have put out a new study that says $3.28 trillion could be at risk because of increased climate variability.

For scale, global oil, coal and gas assets are valued at $6.57 trillion.

“It implies that the value today should be written down by that amount,” says Professor Simon Dietz, a director of the Grantham Research Institute at the LSE.

“One has to, of course, bear in mind that it's just an economic model, and as a famous statistician once said, all models are wrong, but some models are useful.”

Under the most pessimistic scenario, the researchers found assets were overvalued to the tune of $31.53 trillion.

But, the models show that if the world can keep global warming from exceeding 2 degrees Celsius, then financial assets are in fact undervalued and would be worth 0.2 per cent more than currently estimated.

“I think most people would agree — particularly as far as the worst case scenario is concerned — these are large numbers. And these are risks that financial regulators and long-term investors would seek to manage,” Professor Dietz said.

He said super funds shared the risk.

“They need to worry about whether climate change could reduce the long-term performance of their investments, and therefore make it more difficult for them to meet their liabilities in the future to people who are retiring.”