Physical climate risk from extreme weather events remains unaccounted for in financial markets. Without better knowledge of the risk, the average energy investor can only hope that the next extreme event won’t trigger a sudden correction, according to new research from University of California, Davis.
“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 the article’s author, Paul Griffin, an accounting professor at the UC Davis Graduate School of Management.
For example, excessive high temperatures, like those experienced in the United States and Europe last summer, can be deadly.
Not only do they disrupt agriculture, harm human health and stunt economic growth, they also can overwhelm and shut down vast parts of energy delivery, as they did in Northern California when PG&E shut down delivery during fires and weather that could trigger fire.
Extreme weather can also threaten other services such as water delivery and transportation, which in turn affects businesses, families and entire cities and regions, sometimes permanently. All of this strains local and broader economies.
Climate-vulnerable locations also factor into risk for energy markets. In the United States, U.S. oil refining is located on the Gulf Coast, an area exposed to sea-level rise and intense storms. Oil refining in Benicia and Richmond, in Northern California, can be exposed to coastal flooding.
Energy companies’ transmission infrastructure is located in arid areas, increasing risk of damage, such as the destruction from recent wildfires in California.
In addition, it is not clear insurance will be available to cover such risks. Add to those risks, Griffin said, “litigation, sanctions and even loss of business from the property destroyed.
Extreme weather climate risk, in summary, is hard to predict.
“Despite these obvious risks,” reads the research paper, “investors and asset managers have been conspicuously slow to connect physical climate risk to company market valuations.”
Reference- Journal Nature Energy, Futurism, University of California, Davis Research Paper