Global warming of 3 degrees C. is likely to cost us 2% of global output. It is set to affect emerging and developing economies much more than developed ones. Capital allocation toward green investment may be considered as a competitive differentiator in portfolios and a strategy to achieve sustainable business and economic models.

The costs of climate change are too high to ignore it

“Why It May Make Economic Sense To Tackle Global Warming,” S&P Global Ratings economists look at the economic implications of climate change, why progress in reducing our emissions has been slow, and ways policymakers and markets can still act to mitigate global warming. Research shows that global warming is costly. More frequent extreme weather events that damage infrastructure will lead to faster capital depreciation. This will lower the rate of return on these investments and thus the incentives for capital accumulation. Increased temperatures are set to affect the labor supply through higher heat-related morbidity and mortality as well as weigh on workers’ productivity as hotter days tend to be associated with a reduction in working hours.

Putting all these factors together, “studies find that global warming of 3 degrees C., which is the estimated trajectory based on countries’ current pledges since 2015, would lower global output by 2% and warming of 6 degrees C. would push it 8% lower.” said S&P Global Ratings senior economist Marion Amiot. “Granted, current estimates are rough, given the large number of assumptions needed to model climate change.” This suggests we might even be underestimating the costs of climate change. Yet, one robust result is that the higher the temperatures, the more damaging climate change will be–and in a nonlinear way.

To invest in the fight against Global Warming

Although it is clear that the cost of inaction rises with higher temperatures, the world has struggled to lower carbon emissions. Limiting global warming to 1.5 degrees C. now seems almost out of reach. According to the latest IPCC report, it would imply lowering carbon emissions to net zero by 2050. So why have we struggled to tackle global warming?

One big hurdle is that its cost remains uncertain and the worst effects will occur in the future, once they are irreversible. This makes it difficult to compute the opportunity cost for acting now. If we discount the future too much, there is little ground for action today. The Trump Administration’s announcement to withdraw from the Paris Agreement even suggests that some see no need to redirect resources toward greener energy to mitigate climate change or lead climate initiatives that carry significant economic benefits.