Financial markets could suffer due to the climate risk. According to new research, if they won’t make a plan for the climate risk, they could face severe correction. Accordingly, the next recession would come soon.
“If the market doesn’t do a better job of accounting for climate, we could have a recession — the likes of which we’ve never seen before,” said Paul Griffin, an accounting professor at the UC Davis Graduate School of Management who is also the lead author of the “Energy Finance Must Account for Extreme Weather Risk” paper. His research was done at the University of California, Davis.
His main idea in the paper published is that there isn’t a good risk plan in place. “Unpriced risk was the main cause of the Great Recession in 2007-2008,” Griffin said.
“Right now, energy companies shoulder much of that risk. The market needs to better assess risk and factor a risk of extreme weather into securities prices,” he added.
Extreme weather doesn’t affect only people, animals, and ecosystems; it changes everything, including the economy. Such risks are excessive-high temperatures that bring death, not only to humans but also to agriculture and even and shut down large parts of energy delivery. Take the Northern California, for example.
Climate Change Could Bring The Next Recession
The climate can affect transportation, water delivery, and so many other facilities. The sad thing is that the weather can change and damage things forever.
“Despite these obvious risks, investors and asset managers have been conspicuously slow to connect physical climate risk to company market valuations,” Griffin said. “Loss of property is what grabs all the headlines, but how are businesses coping? Threats to businesses could disrupt the entire economic system.”
Although the climate is tough to predict, it must be taken into consideration somehow, and improve the plan in case of a risk.
“While proprietary climate risk models my help some firms and organizations better understand future conditions attributable to climate change, extreme weather risk is still highly problematic from a risk estimation standpoint,” said Griffin.
He added that “this is because with climate change, the patterns of the past are no guide to the future, whether it be one year, five years, or 20 years out. Investors may also normalize extreme weather impacts over time, discounting their future importance.”