US study says extreme weather could bring next recession

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Physical climate risk from extreme weather events remains unaccounted for in financial markets. Energy investors should plan for weather risk to avoid extreme event, according to a new research from the University of California, Davis (UC Davis).

The paper, "Energy Finance Must Account for Extreme Weather Risk," was published Monday in the journal Nature Energy.

"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, author of the study and an accounting professor at the UC Davis Graduate School of Management.

The central message in his latest research is that there is too much "unpriced risk" in the energy market. "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.

Excessive high temperatures, for example, not only disrupt agriculture, harm human health and stunt economic growth, but also can overwhelm and shut down vast parts of energy delivery. 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, according to the study.

"Despite these obvious risks, investors and asset managers have been conspicuously slow to connect physical climate risk to company market valuations," Griffin said.

Extreme weather climate risk is hard to predict. Investors may normalize extreme weather impacts over time, discounting their future importance, according to the study. 

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