Extreme weather may lead to next recession: Study

The risks faced from climate change remains unaccounted for in financial markets, according to a study which warns that without better knowledge of the dangers posed, extreme weather events may lead to the next recession.

The study, published in the journal Nature Energy, said that there is high "unpriced risk" in the energy market.

"Unpriced risk was the main cause of the Great Recession in 2007-2008," said study author Paul Griffin from the University of California (UC) - Davis in the US.

"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," Griffin said.

He said energy companies currently shoulder much of the unpriced risk but added that the financial market needs to better assess the risk, and factor in extreme weather consequences into securities prices.

Citing an example, he said excessive high temperatures, like those experienced in the US and Europe last summer, not only disrupted agriculture, harmed human health, and stunted economic growth, they also overwhelmed and shut down vast parts of energy delivery.

Griffin added that extreme weather can also threaten services such as water delivery and transportation, affecting businesses, families, and entire cities and regions, sometimes permanently, which together strains local and broader economies.

"Despite these obvious risks, investors and asset managers have been conspicuously slow to connect physical climate risk to company market valuations," Griffin said.

According to the study, climate-vulnerable locations also factor into risk for energy markets.

In the US, he said, oil refining is located on the Gulf Coast -- an area exposed to sea-level rise and intense storms.

Energy companies' transmission infrastructure is located in arid areas, increasing risk of damage from wildfires, Griffin noted.

The study also said it is unclear if insurance would cover these climate risks.

"While proprietary climate risk models my help some firms and organisations better understand future conditions attributable to climate change, extreme weather risk is still highly problematic from a risk estimation standpoint," Griffin said.

"This is because with climate change, the patterns of the past are no guide to the future, whether it be one year, five years or 20 years out. Investors may also normalise extreme weather impacts over time, discounting their future importance," he added.