Financial markets could face upheaval if the risks of climate change are not taken more seriously, McKinsey warned in a report on Thursday. Even climate-conscious investors, companies and regulators could be wrongfooted as slight increases in global temperatures threaten to create havoc, said the consultancy’s research arm, the McKinsey Global Institute.
“Markets have been premised on the context of a relatively stable climate,” said Jonathan Woetzel, one of the report’s authors. “But there is an edge where risks can spike, which calls into question the capacity of the system.” McKinsey said this risk was prominent in areas such as south Asia, where temperatures were pushing up against the limits of human endurance. If the heat gets worse, productivity could tumble. As much as 4.5 per cent of India’s gross domestic product could be at risk annually as rising temperatures threatened to cut the number of hours people could work, the researchers said.
The report comes as big names in finance have issued warnings about climate change’s potential to reshape the markets. Larry Fink, chief executive of BlackRock, made waves this week with his annual letter to clients predicting significant asset repricing as a result of climate risk. In a separate report on Thursday, rating agency Moody’s said rising sea levels posed a long-term threat to the creditworthiness of countries across Asia, the Middle East and north Africa.
Mark Carney, the departing governor of the Bank of England, also recently warned that companies and investors needed to step up planning for climate change, or assets might become worthless. By 2030, all of the 105 countries assessed by McKinsey – which represent 90 per cent of global GDP – were likely to suffer from physical changes such as increased water stress, flooding or a greater number of people exposed to extreme heat, it said.
In Florida, for example, losses from flooding could devalue homes by between 15 per cent and 35 per cent by 2050, which could have a knock-on effect of denting local tax revenue and making long-term borrowing unavailable. The insurance sector is particularly vulnerable, according to the report.