Provided that warming from climate change can be kept under 2☌, the average projected losses can beĬut in half, while the extreme losses, identified as tail risks, can be reduced by more than three-quarters. Lower greenhouse gas emissions decrease the probability of temperature Reduced, but fortunately, mitigation can greatly reduce these risks. The value at risk assessed by this research should be considered the expected losses to global assets if emissions fail to be substantially The long time horizon, coupled with private-investor discount rates, can lead to a remarkable tolerance for systemic environmental While the value of future losses from the private sector is substantial, this is dwarfed by the forecast harms when considered from a government Review_Ûconomics_climate_change/stern_review_report.cfm The discount rate, and the higher the discount rate, the lower the present value of the future cash flows. The cost of capital is commonly applied as a discount rate by both privateĤ The Economics of Climate Change: The Stern Review. Bank assets areĮxcluded as these are, largely, managed by banks themselves.ģ Present value is a common financial metric used to assess the current worth of a future stream of cash flows given a specified rate of return. Represents present value losses worth US$43trn-30% of the entire stock of manageable assets.īy way of scale, the current market capitalisation of all the world’s stockmarkets is aroundġ Value at risk measures the size of the loss a portfolio may experience, within a given time horizon, at a particular probability.Ģ Our value for the stock of manageable assets is the total stock of assets held by non-bank financial institutions, as estimated by the Financial Stability Board. Of a government, employing the same discount rates as the Stern Review,4 they rise dramatically.įrom the public-sector perspective, the expected value of a future with 6☌ of warming When the expected losses are considered from the point of view However,Īs climate change is also a systemic problem, with issues of wider societal concern, it is oftenĪppropriate to apply a lower discount rate, consistent with public-sector actors that have longer These values are based on the discount rate of a private investor, a reasonable baseline as theĪffected losses mentioned above will be on the privately held pool of global assets. US$13.8trn of manageable financial assets, roughly 10% of the global total. Of the London Stock Exchange - while 6☌ of warming could lead to a present value loss of Warming of 5☌ could result in US$7trn in losses – more than the total market capitalisation Probabilities, and the tail risks are far more serious. Is the average (mean) expected loss, but the value-at-risk calculation includes a wide range of With the total value of all the world’s listed oil and gas companies or Japan’s entire GDP. In our findings, in discounted, present value terms,³ are valued at US$4.2trn-roughly on a par The world’s current stock of manageableĪssets is estimated to be US$143trn.² The resulting expected losses to these assets identified ![]() ![]() Global stock of manageable assets (the climate VaR). This research estimates the value at risk (VaR)1 to 2100 as a result of climate change to the total To highlight the relevance of climate change to the asset management industry and beyond, The only source of concern on the contrary, the outliers, the particularly extreme scenarios, may ![]() Crucially, however, climateĬhange is a problem of extreme risk: this means that the average losses to be expected are not Probably irreversible problem beset by substantial uncertainty. Indirectly, through weaker growth and lower asset returns. Assets canīe directly damaged by floods, droughts and severe storms, but portfolios can also be harmed Is facing the prospect of significant losses from the effects of climate change. The asset management industry-and thus the wider community of investors of all sizes. © THE ECONOMIST INTELLIGENCE UNIT LIMITED 2015 R E C O G N I S I N G T H E V A L U E A T R I S K F R O M C L I M A T E C H A N G E
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