Equity markets have generally ignored the increasing number of natural disasters over the past 50 years and tougher rules are needed to make investors aware of the dangers posed by the climate crisis, the International Monetary Fund has said.
Companies should be forced to disclose their exposure to climate risk because a voluntary approach does not go far enough, the IMF said.
The IMF said global temperatures were currently 1.1C above their pre-industrial level and were on course to rise by a total of 3C unless stronger action was taken.
“Climate change induced by this level of warming is, in turn, expected to adversely impact the world’s stock of natural assets, lead to a significant rise in sea level, and increase the frequency and severity of extreme weather event,” the IMF said. “As the frequency and severity of climatic hazards rise, the resultant socioeconomic losses could be significantly higher than in recent history.”Last year was also marked by a series of severe weather-related events, including flooding in the US and bushfires in Australia, but the IMF said this was part of a trend for the number of disasters to increase “considerably” in the past few decades, from slightly more than 50 in the early 1980s to about 200 since 2000. It noted that Hurricane Kartrin devastated New Orleans in 2005, and Dominica suffered damage amounting to more than twice its GDP when Hurricane Maria struck in 2017.
Even so there had been little indication that investors had become more aware of the potential losses they could face if global temperatures continued to rise, with only a modest impact on stock markets, shares in banks and insurance companies from large disasters. The IMF said. “This suggests that equity investors may not be paying sufficient attention to climate change risks.”
“Of course, strong policy actions to mitigate climate change would reduce greenhouse gas emissions and future physical risk in the first place, conferring benefits to mankind that extend well beyond the realm of financial stability. Yet, from a financial stability perspective, this transition to a lower-carbon economy needs to be carefully managed to avoid abrupt and unanticipated repricing of portfolios and economic dislocation.”