The Financial Implications of Climate Change: They Go Deeper Than You May Think
How often do you think about climate change and its impact on your bank account? It’s not just economic inflation, pandemics, and conflict that impact our finances. Weather does too!
While you may initially attribute price increases to the inflation triggered by the pandemic, or war overseas, another key driver could be climate change. The level of carbon dioxide in the Earth’s atmosphere has hit the highest level since measurements began 63 years ago, according to a study by National Oceanic and Atmospheric Administration (NOAA).
Climate change is causing higher levels of risk as a result of more severe droughts, flooding, and temperatures, especially in the seven industries at greatest risk from climate change, including oil & gas and food. The others are energy, agriculture, beverage, commercial fishing, insurance, skiing, wineries, and Wall Street.
The Utility Grid: Water & Electricity
Energy infrastructure is in danger from more intense storms, higher storm surge, and flooding. Power lines that distribute electricity can become life-threatening when damaged, felled, and covered by floodwaters. More storms lead to additional repair and maintenance requirements. It drives up operating costs, which are then passed on to customers at higher prices.
Aging utility infrastructure is also contributing to higher risks, leaving the U.S. electric utility sector vulnerable to failure from climate shocks such as hurricanes and wildfires.
Climate Change Helps—and Hinder—Agriculture
In agriculture, risk comes from warmer temperatures accelerating the growth of some crops like grains. However, it also lowers yields from the seeds from not having adequate time to mature. For example, in 2021, California agriculture experienced $1.2 billion in losses from a changing climate; as a result, 8,700 farm jobs were lost.
Lower crop yields threaten the beverage industry that provides some of the most popular beverages like coffee. Coffee beans are grown around the world by smaller farmers. Changing weather patterns—especially droughts—make it increasingly more difficult for farmers to grow crops with high yields they sell to manufacturers. Also, storms and flooding disrupt shipping and supply chains, making it harder to produce and distribute products…and we know all about that from Covid.
Insurance Policy Coverage Decreases & Premiums Increase
More frequent natural disasters increase physical, liability, and transition risks for the insurance industry. A large group of U.S. state insurance regulators indicated they expect climate change risks to increase over the medium to long term, according to the Insurance Regulator State of Climate Risks Survey, conducted by the Deloitte Center for Financial Services.
Plus, global warming is forcing a shift in insurance industry regulations, coverage availability, underwriting assumptions, and premiums. Both insurance companies and their customers need to be more proactive in natural disaster preparedness and ensure they do not underestimate recovery and medical costs by factoring in realistic rising costs.
Green Stocks Grow & Brown Stocks Decline
The effects of climate change on the U.S. financial industry and economy are frequently covered in the media: the combination of fact-based information and fake news driving an up-and-down pattern in the financial industry.
Any significant news reported about climate change impacts Wall Street and associated stock activity. Green stock (companies with relatively low carbon emissions) prices experience a boost, while brown stock (companies that emit large quantities of greenhouse gases) prices drop.
It is a pattern cited in several research papers, including ‘Sustainable Investing in Equilibrium’ published by the Journal of Financial Economics and ‘Climate Change Concerns and the Performance of Green Versus Brown Stocks’ written by a group of economists affiliated with the National Bank of Belgium.
Other areas being affected are creditworthiness and infrastructure, according to the Blackrock Investment Institute. Credit worthiness risk of state and local issuers in the $3.8 trillion U.S. municipal bond market is growing.
We All Need to Factor in Rising Prices
Despite all these reports, some financial regulators continue to ignore the clear systemic (long-term) risk that climate change poses to financial institutions and markets in return for short-term gains. The Federal Reserve Board and the Financial Stability Oversight Council (FSOC) can put in place statutory mandates, as well as provide the tools necessary for financial supervisory and regulatory frameworks to reduce climate-related risk and maintain financial stability.
The more extreme and frequent weather events become, the higher your potential for financial impact. With both on the rise, it behooves you to start working now on steps to save—rather than spend—money in your wallet or bank account. It begins by considering the big picture that includes higher risk and prices in the aforementioned industries…and as we all know, this is just the beginning! There’s a world of unknowns out there, so we may as well prepare now.