Extreme weather conditions such as floods and droughts can cause a catastrophic economic recession “like we’ve never seen before”
- Current financial markets do not take the risk of natural disasters into account
- Experts warn that as a result, the markets run the risk of a catastrophic collapse
- If the markets suddenly correct, the impact on the consequences can be disastrous
- Has potential to reduce the Great Depression and the Great Recession of 2008
Extreme weather can cause an economic recession worse than anything in human history, experts warn.
The current financial markets do not take into account the risk of horrific natural disasters such as floods and droughts.
As a result, investors run the risk of a sudden correction and crash that destroys the global economy unless measures are taken to mitigate its impact.
Researchers believe that a crash caused by disasters would reduce the infamous Great Depression and the Great Recession of 2008 and be the worst economic crisis ever.
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Depicted: a dried-up bed of the Namoi River, situated on the edge of its drought-damaged property, near the town of Walget in northwestern New South Wales. Such extreme weather conditions can one day cause collapse in economic markets
Study author Professor Paul Griffin, of the Davis Graduate School of Management of the University of California, said, “If the market doesn’t better account for the climate, we could have a recession – like we’ve never seen before.”
He explained that the central message in his latest research is that there is too much ‘unpriced risk’ on the energy market.
Professor Griffin said: “Unpriced risk was the main cause of the great recession in 2007-2008.
‘At present, energy companies bear a lot of that risk. The market must better assess risks and take into account a risk of extreme weather in the prices of securities. “
He said, for example, high temperatures, such as those experienced in Europe and the United States last summer, can be crucial.
The current financial markets do not take into account the risk of horrific natural disasters such as floods and droughts. As a result, investors run the risk of a sudden correction and crash that destroys the global economy, unless measures are taken to mitigate its impact
In addition to the risk to human health, they can overwhelm huge parts of the energy supply, as they did in Northern California when PG&E stopped the power supply to nearly 200,000 people last year due to a fire hazard.
Extreme weather also threatens other services, such as water supply and transport.
Professor Griffin said that all of those factors burden the local and wider economies.
But he said: “Despite these obvious risks, investors and asset managers have been remarkably slow in linking physical climate risk to market valuations of companies.
“Loss of ownership is what catches all headlines, but how do companies deal with it? Threats for companies can disrupt the entire economic system. “
The research is published in the journal Nature Energy.