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The top 7 reasons businesses should fear climate change

A recent report from the Economist lays out the global cost of inaction on climate issues.

Climate change poses a serious, potentially "catastrophic" risk to the world's economy, according to a report released late last month by the Economist Intelligence Unit (EIU).

Sponsored by insurance giant Aviva, the report set out in the starkest terms how much inaction on climate change is likely to cost the world economy.

The numbers are eye-wateringly huge, and echo the findings of recent reports from Lord Stern, the Grantham Institute and the London Assembly, which all highlight the economic imperative for tackling climate change.

BusinessGreen highlights the key conclusions from the EIU study:

1. The private sector will be hit hard

The world's current stock of manageable assets is about $143 trillion. Expected losses from climate change are valued at $4.2 trillion in 2100 in today's value.

That's roughly equivalent to the total value of all the world's oil and gas companies, or the entire GDP of Japan. These values are based on the discount rate of a private investor.

2. But public sector investors will be hit even harder

When the risk of climate change is applied from the perspective of a government, the potential losses rise dramatically to $13.9 trillion in 2100.

3. The tail risks are far more serious

The figures above were calculated using the mean average potential loss, which includes a range of risk probabilities.

The tail risks are far more serious. In a scenario where warming hits 6 degrees Celsius by 2100, private investment loss reaches $13.8 trillion — roughly 10 percent of the value of manageable financial assets.

For public sector investments, 6 degree warming represents $43 trillion of value loss — a third of all manageable assets.

4. Climate change will affect all sectors

Much of the financial impact of climate change will come from weaker growth and lower asset returns across the board, the report stated.

"Asset managers cannot simply avoid climate risks by moving out of vulnerable asset classes," it stated.

5. The damage will be permanent

Monica Woodley, editorial director of EMEA content solutions at the EIU, said the key thing to note was that damage would be permanent and irreversible.

"This isn't a recession, or a financial crisis, or a regular part of a business cycle," she said. "Losses from climate change do not merely represent market volatility, or isolated events, but permanent damage to global assets.

"It should be recognized that unless climate change is mitigated, this research depicts a permanent divergence towards a path of lower growth and diminished prosperity."

6. Limiting warming to 2 C vastly reduces the risk 

If an average global temperature rise is kept under 2 C, average projected losses are sliced in half. Meanwhile, the risk of more extreme losses — the so-called tail risks — drop by more than three-quarters.

7. The solution? Regulation, transparency and a strong carbon price — all of which will affect businesses

The report called for governments to enact "comprehensive carbon pricing mechanisms" that adequately reflect carbon's externality costs.

It also argued financial regulators need to ensure that best reporting practice becomes standard practice, by requiring the disclosure of carbon emissions.

In addition, stock exchanges around the world should require disclosure of greenhouse gas emissions by all listed companies, while investors must integrate climate change into their risk management, the report concluded.

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