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Why climate change could lead to a financial crisis (and what we can do about it) | CNBC Reports - YouTube
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Hurricane Katrina, one of the聽
most destructive natural disasters聽
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in U.S. history, wreaked聽
damage worth $170 billion.
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That's an amount so staggering it dwarfs the
annual economic output of most nations.
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Flooding alone destroyed 300,000 homes in New Orleans,聽
while 19% of U.S. oil production capacity
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was taken offline because
of the 2005 hurricane season.
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This is just one example of how聽
climate change not only has a聽
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human and environmental toll,聽
but also a huge financial cost.
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One that economists say could lead
to the world鈥檚 next big financial crisis.
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Climate change is the
biggest challenge we face.
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No one nation can solve
this problem by itself.
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And the worst thing would be if, you know,
people care about this issue, we have this goal,
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but 10 years from now people are going to see聽
that we are not really聽going to get the number down
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Fighting climate change has hit the mainstream,
with many of the world鈥檚 most聽prominent leaders speaking out.
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Yet, despite the sense of urgency,
one common misconception is that we will need to
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trade a healthy economy and jobs聽for a sustainable planet.
Is there any truth in that?
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I think now there is聽an understanding
that this has some risks,
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they also realize they might face some
financial losses if they don鈥檛 do anything.
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Yannis Dafermos has done extensive research
on climate change and financial stability.
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He walked me through the two main reasons
climate inaction could be a financial time bomb.
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There are the physical effects,
such as extreme weather events,
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and the carbon transition,
the impact that moving to a less
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carbon dependent economy聽
will have on many industries.聽
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Let鈥檚 start by looking
at the physical risks.
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These disasters are becoming
more聽frequent and more severe.
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Kristalina Georgieva is the
International Monetary Fund鈥檚 managing director.
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Property is affected, production capacity of agriculture,
of industry is affected, even聽the very financial institutions
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may be affected and what this translates
into is a risk for financial stability.
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Disasters cost the global聽
economy $146 billion in 2019.聽
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Insurers covered $60 billion
of that amount.
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In fact, one of the largest insurance companies
in the world, Swiss Re,
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said that extreme weather events
are growing in both number and severity.
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This means many industries are bracing
for even bigger losses in the future.
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But these losses aren鈥檛聽just lines on a spreadsheet.
They impact people like you and me.
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Tens of millions of people, for example,
have been displaced from their聽homes due to extreme weather.
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So, how could that trigger a financial crisis?
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Let鈥檚 look at the fallout that could
follow extreme flooding as an example.
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If the flooding were to聽
happen in a populated area,聽
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property would inevitably be damaged聽
or even completely destroyed.
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It is estimated that 50 to聽80%
of economic losses caused聽
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by natural and man-made聽
catastrophes globally are uninsured.
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This means an uninsured homeowner聽
who took out a mortgage to聽
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purchase the property likely won鈥檛聽
be able to pay back their lender.
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Factor in this happening to
many, many more people聽
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and banks are left without聽
income from mortgage repayments.
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As a result, lenders might reduce
the number of loans they provide,
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or charge more for the service
in the form of interest.
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Prospective homeowners looking to
get a mortgage might not be able to do so,
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and businesses may struggle to
get loans to expand their operations.
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It wouldn鈥檛 be long before you have
an economy grinding to a halt.
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Although it had a different catalyst,
the Great Financial Crisis聽resulted from
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banks discovering that investments backed by聽
property had become near-worthless,聽
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and the ensuing credit crunch聽
caused the global economy to shrink.
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This is not the only risk聽
facing our financial system.聽
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Managing Director Georgieva filled me in.
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The world is clear that we have to move from a
high to a low carbon intensity
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so we can protect ourselves
from rising temperatures
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and the very disasters I spoke about,
but when that happens,
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industries that are in that area of high
intensity become less valuable,
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asset valuation changes and聽
this shift, if it is abrupt,聽
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can be quite difficult
for financial institutions.
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More countries are committing to becoming
carbon neutral in the coming decades,
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meaning they are trying to reduce emissions of CO2
and even capture greenhouse gases from the air.
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But this transition to carbon neutrality requires
many businesses to change how they operate.
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Let's imagine that an oil-producing company
has not changed its business model to
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focus more on renewable sources of energy.
As societies use less gasoline,聽this firm may lose value.
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It simply becomes less attractive to investors.
If many companies end up losing value because they
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aren't adjusting to a low-carbon society,
then this could eventually聽spark a market sell-off too.
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If this happens without
too much preparation,聽
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this can cause a kind of a聽
shock to financial markets.
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There might be some indirect effects through
the interconnection聽of the financial system,
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I mean even those who might have already decided
to invest more in green financial products,
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if the financial system overall has a problem,
they might also see some losses.
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We live in an interconnected world聽
and financial markets span the globe.聽
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That鈥檚 why a tsunami in Japan聽
or wildfires in California
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could have an impact on the聽
retirement plans of a worker in Italy聽
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or on the stocks you bought using聽
platforms like Robinhood and eToro.
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One element that could lead investors to聽
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adjust their positions in聽
the market is a carbon tax.
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These levies are being discussed聽
in a wide range of countries and聽
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would focus on taxing companies聽
according to their emissions.
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By making these firms pay more, governments hope
that they will be incentivized to pollute less.
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If in the coming years, governments聽
realize that it is necessary聽
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to act quickly in order to reduce emissions,
they might therefore decide
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to increase carbon taxes very quickly
within a short period of time,
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and this will be a problem聽
for those companies that聽
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rely too much on gas, oil,聽
coal for their production.
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And then those banks that have聽
provided loans to these companies聽
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might not be in a position
to remain stable.
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So, what can be done to reduce
the risks posed by climate change?
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The very first and most important thing they need to do
is to put in place policies and investments
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to shift towards the new climate economy,
one that is low carbon and climate resilient,
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but they also need to concentrate聽
on the financial system聽
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because it is essential for the聽
functioning of our economies.
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In the European Union,
governments are working on聽
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several measures as they聽
implement the European Green Deal.
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The plan aims to revitalize聽economic growth in the bloc
whilst reducing the consumption of resources,
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with a pledge to cut net greenhouse gas
emissions to zero by 2050.
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In addition, the U.S. has also promised to halve
emissions by 2030 compared with 2005 levels.
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Japan, Canada and even China聽have also announced plans
to reduce emissions in the coming years.
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Central banks, charged with聽
ensuring economic stability,聽
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have also started studying how to聽
tackle climate risks in their policies.
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Climate change is the
biggest challenge we face聽
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but it is also the greatest聽
opportunity of our lifetimes
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because managing climate risks is taxing,
but the way we do it
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by investing in climate聽
resilience and new technologies,聽
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offers opportunities for聽
green growth and green jobs.
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Investing in a low-carbon society
may have wider economic benefits too.
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An initial 5% of GDP green investment push
combined with gradually increasing carbon prices
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and attention to those that are affected
negatively from the transition,
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this can be very beneficial聽
for the world economy,
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it can聽increase growth by 0.7% on an聽
annual basis over the next 15 years.
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Hi everyone,
thank you so much for watching.
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Are you worried about the risks that climate change
could pose to your savings and investments?
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Let us know in the comments section,
and I will see you soon.
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