Extreme weather events are the new normal in many parts of the world. Climate change is fueling a surge in such events, and if emissions are not tackled decisively, this will almost certainly become the norm.
This extreme weather is already making a dent in the economy, but unfortunately, investors don’t seem to be aware of the connection.
A new study by researchers at the University of California said the financial markets aren’t considering the impacts that extreme weather events such as droughts and floods would have in the economy, which could suffer a record-recession if markets continue following the same path.
“If the market doesn’t do a better job of accounting for climate, we could have a recession—the likes of which we’ve never seen before,” said the study’s author, University of California professor Paul Griffin, in a statement.
The research. published in Nature Energy, focused on the energy sector and claimed there is a lot of “unpriced risk” that companies are not considering. Record temperatures, for example, can overwhelm and shut down vast parts of energy delivery as it happened in Northern California.
“Despite these obvious risks, investors and asset managers have been conspicuously slow to connect physical climate risk to company market valuations,” Griffin said in his article. “Loss of property is what grabs all the headlines, but how are businesses coping? Threats to businesses could disrupt the entire economic system.”
The study said energy markets should also consider the location of power stations and refineries, as many could be hit by extreme weather events. For example, Griffin mentioned that many refineries in the US are located on the Gulf Coast, which is an area that could be affected by sea-level rise and storms.
Transmission infrastructure of energy companies could also be affected because of climate events as most is located in arid areas, the research said, mentioning the recent wildfires in California as an example. The companies affected could face losing their business because of the property destroyed, Griffin said.
This is not the first time a study looks at the connection between extreme weather events and economic impact. The US Fourth National Climate Assessment, published in 2018, warned that emissions aren’t reduced, and adaptation measures are taken, climate change could seriously disrupt the economy
At the same time, a recent study looked at the impacts of climate change in 22 different economic sectors under two warming scenarios, one at 2.8ºC and another one at 4.5ºC. If the second one prevails, the impacts on the 22 sectors would cost the US up to 520 billion dollars per year
According to Morgan Stanley, climate disasters have cost North America 415 billion dollars in the last three years, mainly because of wildfires and hurricanes. For example, Texas’s estimated losses from Hurricane Harvey were 125 billion, while hurricane Sandy caused about 71 billion of damages in 2012.
We’ve already seen how vulnerable the economy is to aspects it doesn’t consider — just take the recent coronavirus outbreak as the most recent example. A singular outbreak is pushing several major economies towards a recession, and unlike the outbreak, extreme weather will become a constant in the future. Tackling climate change is not an environmental problem, it’s also an economic problem, and we’d be wise to rise up to the challenge.