Grim scenario

Climate-related financial risks should be mainstreamed

Every year, on the eve of its high-profile conference at Davos, the World Economic Forum releases a report that outlines what its stakeholders believe are the major risks to the global order and to geo-economic stability. This year’s report is somewhat unusual, in that all top five risks, as estimated by the report, are related to climate change. The headline concern of the report is: “Climate and corresponding economic risks threaten a 2008-style systemic collapse unless net human-caused carbon dioxide (CO2) emissions fall by 50 per cent by 2030 relative to 2010, and to net zero by 2050.” The report outlines the multiple axes upon which climate change and weird weather will impact societies, conflict, and economic stability. Health impacts of extreme weather and greater heat stress will directly impact the poorest societies that already have over-stretched health systems, such as India. Food production and water availability will be under increasing pressure, which again has major consequences for an India that is already struggling to equitably and efficiently distribute water. Internal and cross-border migration will inevitably increase — the current conversation around the National Register of Citizens and the Citizenship Amendment Act only prefigures the political disputes in the decades to come as climate-induced migration swells to a flood. The report points out that there is essentially a decade left to deal with the problem.

 

Yet, in some ways, it is the direct economic threat of climate change outlined in the report that deserves immediate attention, as climate risk simply does not figure enough in discussions of macro-economic stability and vulnerability. This risk operates on several levels. For instance, there is the damage caused to the economic base by extreme weather events. Of the $165 billion of damage caused by natural disasters in 2018, about half was to assets that were uninsured. In fact, as climate-related damage becomes both more common and less predictable, insurance may not be able to keep up. Entire segments of assets — for example, coastal infrastructure and housing — might become effectively uninsurable. The effects on labour productivity because of heat stress and the spread of disease to new areas opened up by global warming will also effectively reduce the economic base. Again, a labour-surplus and less developed country like India will find its ability to grow severely compromised by an increase in heat stress and a further reduction in health indicators.

 

Financial regulators, policymakers, and investors need to mainstream climate risk into their analysis. In the Indian case, for example, infrastructure investment needs to routinely analyse the effect of more extreme climate on the value of the asset. Companies need to start revealing their exposure to climate change risks — in some jurisdictions, listed companies are now expected to do so routinely, and the Indian market regulator should look into how soon similar disclosure requirements can be announced in this country. A whole-of-economy look at climate risks in India is overdue. For example, to what degree are existing “dirty” assets — old coal power plants and unextracted coal mines — likely to lose value as India undergoes its green transition? What will be the effect on banks and government finances? Given the compressed time-frame for climate action, preparing the financial ground for proper risk assessment is overdue.