STAN HONDA/AFP
There are impeding and alarming signals of a major correction and the risk of a stock market crash after years of robust gains following the international health crisis. Analysts have been warning for months of an imminent crash in the world stock market and the first signs are here with a global sell-off, the meltdown of bitcoin and the collapse of carry trade in Japan.
In the future, our planet climate may be the driver of crashes in stocks, according to several studies. The likely trajectory of climate change, given current global performance on emissions reduction, and extremes becoming more frequent and destructive may lead to significant losses, warn some experts.
Crop failure will lead to much higher food prices and millions of economic refugees. Prime real estate and agricultural land in coastal areas will be abandoned in the face of repeated flooding. Carbon-dependent industries will face sudden closure as public opinion and government regulation shifts, while other sectors will suffer potentially devastating supply chain breakdowns.
Some researchers have found higher risk premia in the sovereign debt of developing countries with greater vulnerability to climate change. There is also some evidence of lower returns (reflecting lower risk) on the equity of firms which are less exposed to climate change.
But, overall, the markets do not seem to be particularly concerned. One fairly common view in the US and Europe is that rapid technological development will solve the problem – and that the markets’ lack of concern itself confirms the value of this position.
Another view is that climate change is inherently complex and uncertain, as are its macroeconomic effects, and while these could become important in the medium or long-term, inflation and rising public debt are higher priorities today.
“Our research as environmental economists and macroeconomists confirms that both the effects of climate change and some of the policies necessary to stop it could have important implications for financial stability, if preemptive measures are not undertaken. Public policies addressing, after years of delay, the fossil fuel emissions that are driving climate change could devalue energy companies and cause investments held by banks and pension funds to tank, as would abrupt changes in consumer habits”, wrote a group of researchers on The Conversation.
The authors point that medial banks will have roles to play as countries try to manage climate change going forward. They add that prudent financial regulation can help prevent barriers to the kind of aggressive policies that will be necessary to slow climate change and protect the environments our economies were built for.