Investors Urged to Act to Help Reduce Up to 60% Financial Downside Risk Due to Climate Change

Investors in a 2.7-degrees-Celcius to 3.6-degrees-Celcius transitioned world economy could face a 50% to 60% downside to existing financial assets by the end of the century.

Source: WTW | Published on November 15, 2022

climate change and health insurance

According to new research from WTW’s Thinking Ahead Institute, investors in a 2.7-degrees-Celcius to 3.6-degrees-Celcius transitioned world economy could face a 50% to 60% downside to existing financial assets by the end of the century, compared to a 15% loss in a well below 2-degrees-Celcius transitioned world economy.

Pay Now or Pay Later is a study that attempts to translate the economic costs and physical impact risks of climate change into effects on financial assets in the investment industry. The method employed allows for the quantification of the relative cost of transitioning the economy at slower or faster rates. It takes into account climate tipping points as well as flaws in current climate modeling and shows that risk increases rapidly as temperatures rise.

“These findings should help investors understand that if significant efforts are not made now to transition to a sustainable economic model, the associated physical risks caused by continued emissions and climate change will potentially lead to major changes in global GDP and income levels in the coming century,” said Tim Hodgson, co-head of the Thinking Ahead Institute.

According to the study, in a more rapid, well-coordinated, and orderly transition, losses could be offset in part by the positive benefits of new primary investment in new energy infrastructure, and providers of this financial capital could expect future returns after the initial drawdown. In this scenario, in addition to productivity gains, there could be an increase in spending on wages, capital goods, and associated cost reductions.

“Climate time frames now overlap with investment time frames,” said Isabella Martin, senior associate at the Thinking Ahead Institute. Inaction may appear to be the less expensive option in the short term, but over a horizon that is completely normal for investment funds, inaction is far more expensive.”

The Thinking Ahead Institute’s Mission

The Thinking Ahead Institute, founded in January 2015, is a global not-for-profit investment research and innovation member group comprised of engaged institutional asset owners and service providers dedicated to changing and improving the investment industry for the benefit of end savers. It has over 55 members worldwide and is an offshoot of WTW Investments’ Thinking Ahead Group, which was founded in 2002.