REUTERS/Mick Tsikas
- Climate change is the next mega-shock about to hit markets, a report from Chatham House said.
- The UK-based think tank warned a series of disasters could hit the economy due to global warming.
- "Whatever the reasons for the markets' current equanimity on climate risks, a sharp adjustment looks increasingly probable."
Climate change is the next shock coming for the global economy, and markets are in for a sharp adjustment as temperature-related headwinds take their toll, according to the Chatham House.
The London-based think tank warned of a series of disasters that could occur as the climate crisis worsens. Food inflation, for one, could rise as crops fail in higher temperatures. Diseases that thrive in hot environments, such as Ebola and monkeypox, could also spread as climate change worsens.
Carbon-dependent sectors could also collapse as governments tighten regulation over carbon emissions. Those effects could ripple across other sectors of the economy via supply-chain issues.
Real estate investment in places vulnerable to climate change – cities like Miami, Shanghai, and Amsterdam – could also see a fallout, and some market activity could be shut down in affected areas, the report said.
That's already beginning to happen in the insurance market, with State Farm and Allstate recently deciding to halt sales of property and casualty policies to new customers in California, due in part to natural disasters.
"The likely trajectory of climate change, given current global performance on emissions reduction, has been spelled out repeatedly. Extreme weather events, like the unprecedented heatwaves suffered by Southern Europe, the US and China this week, will become even more frequent and destructive as a result," Chatham's global economy and finance program director Creon Butler said. "The severe economic and financial consequences of climate change are also clear, particularly given the enormous shortfall to date in spending on adapting to what is to come."
That's likely not priced into assets at the moment, Butler added, citing overly optimistic views that technology will solve global warming-related issues as well as the market's bias toward more immediate issues like inflation versus more complex and longer-term issues like climate change.
Markets could realistically face a steep correction resulting from climate change within the next five years, the think-tank predicted.
"Whatever the reasons for the markets' current equanimity on climate risks, a sharp adjustment looks increasingly probable. The longer it is delayed, the sharper it is likely to be – and the more potential triggers emerge," Butler said.
"It can no longer be argued that these are highly uncertain or distant prospects. In many cases they are now inevitable, even if mitigation policies accelerate radically," he later added.
Other experts have warned of the potential havoc climate change could wreak on the global economy. "Dr. Doom" Nouriel Roubini, the economist who called the 2008 subprime mortgage crisis, refers to climate change as a "mega threat" – part of a group of forces that's setting the world economy on a "slow-motion train wreck."