We're All Climate Catastrophe Preppers Now
(Bloomberg Opinion) -- Preppers like to buy property in remote places like New Zealand or stockpile canned food in their basements in case civilization collapses. They are weirdos, or so I thought until I had a kid.
A girl born in Germany today can expect to live long enough to draw a pension in the year 2100. But unless our emissions are drastically reduced, the world she will inhabit is on track to be more than 3 degrees Celsius (5.5 degreesFahrenheit) warmer than pre-industrial times – a level not seen on this planet for some 3 million years. The northern hemisphere's past summer – which followed just one degree of warming – gave a foretaste of what that means: more droughts, powerful hurricanes, flooding and deadly wildfires.
How should we steel ourselves for an environment like that? Financially, speaking, the answer involves thinking more like a prepper. I haven’t started stockpiling supplies (yet) – but it’s starting to affect some important long-term decisions. Should I have more children? (Probably not) Where should I buy a house? (Definitely not near the ocean).
Will climate change affect a family's investment plans? Almost certainly. Losses from climate change could be large and permanent. And I'm not just talking about risks to the insurance industry and potentially “stranded” oil and coal reserves that Bank of England governor Mark Carney highlighted in a 2015 speech. Climate change is a systemic problem, and lower economic growth means investors will struggle to avoid this risk.
I'm fully aware that money matters not a jot compared to, say, whether hundreds of millions of people in developing countries are displaced by flooding, desertification, or intolerable heat. Germany isn't that vulnerable to the worst effects of climate change and is rich enough to deal with what comes its way.
But that doesn’t mean we shouldn’t talk about how climate change could impact returns – indeed it’s something pension fund managers and actuaries are starting to pay serious attention to.
The trouble is humans aren't very good at pricing the risk of long-term calamities: otherwise, people would have ceased buying multi-million dollar condos in low-lying Miami Beach by now. Equity markets are more concerned with the near-term path of interest rates and probability of recession than they are with the melting ice sheets.
But just because the worst effects of climate change won't show up until the second half of this century, that doesn't mean markets won't adjust sooner, and perhaps then quite rapidly.
“Short-term shifts in market sentiment induced by awareness of future, as yet unrealized, climate risks could lead to economic shocks, causing substantial losses in financial portfolio value within timescales that are relevant to all investors,” is how academics at the University of Cambridge summarized the issue in this November 2015 report.
In an effort to quantify such a long-term and variable-rich problem, strategists have borrowed a concept from the world of high finance: value-at risk. VaR measures a portfolio's worst-case loss over a specified time horizon and at a given probability.
It's an imperfect concept, to be sure: during the financial crisis it spectacularly underestimated banks’ vulnerability to losses. But if VaR helps gets financial types thinking more about the risks of catastrophic change, I’m all for it.
So how much of the global stock of financial assets is at risk of destruction due to climate change? An Economist Intelligence Unit study found that $4 trillion of wealth (in today's money) could be obliterated by 2100 and perhaps as much as $14 trillion (or 10 percent of the total) if the planet warms by 6 degrees.
How come? In a warmer world, the economy will probably grow more slowly. Humans are far less productive at high temperatures. There will be periodic losses of infrastructure and real estate assets through storm damage. Government budgets will also be battered by the cost of rebuilding and damage-prevention efforts, just as tax receipts decline.At some point, society may decide there’s no point in rebuilding, leading to a permanent loss of productive capacity. Hence returns from equities and other financial assets will probably be lower.
The problem is most acute for developing countries, many of which will be among those most severely hurt by climate change. These economies tend to more dependent on agriculture and they lack the financial resources to adapt by, constructing flood defenses, for example.
I’m not confident that humanity will prevent temperatures increasing more than an acceptable 1.5 degrees. Co-operation isn’t very fashionable right now: Donald Trump doubts humans cause climate change (or doesn’t care), and has pulled world's largest economy out of the Paris climate accord. Even Germany, a climate leader, still depends on coal for more than a third of power production. We’re alarmingly far off the path towards carbon neutrality.
This all sounds bleak, and it is, but there is one sliver of hope. People don't like things that make them poorer. The more global temperatures rise, the more people stand to lose – and unlike a recession there’s no quick rebound from climate change.
If fears of material financial loss for ourselves and our children can't motivate us to change our ways, then perhaps nothing will. In the meantime, assume asset returns will be lower than they might otherwise have been and try to put aside more money today. We are all preppers now.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.
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