2024 was the first calendar year that the global average temperature reached more than 1.5°C above the pre-industrial level. Last year’s jump in atmospheric carbon dioxide is particularly alarming. The evidence suggests that climate change is accelerating. This is our single biggest secular concern for financial markets over the coming years. The abject failure to tackle climate change will at some point force a reckoning.
We will continue to explore the potential transmission channels of climate change risk. The Financial Stability Board published, on January 16th, a report titled: Assessment of Climate-related Vulnerabilities: Analytical framework and toolkit. It is in response to the growing risks to financial stability from climate change. One plausible scenario: climate change will egregiously impact on public sector finances through higher costs from damage and destruction, loss of economic output, collapse of insurance coverage, etc.
Ultimately, climate change is a huge negative supply shock. Severe weather events will continue to intensify, as will the damages caused by natural disasters. More frequent, and larger, negative supply shocks will push up prices, weaken economies, and make it more difficult for central banks to hit their inflation targets. AccuWeather has updated and increased its preliminary estimate of the total damage and economic losses from the devastating LA fires, to between $250bn and $275bn.
