Schroders climate change survey: economists expect

inflationary impact
Keith Wade, Chief Economist and Strategist
Marcus Jennings, Economist
We surveyed economists at investment banks regarding the impact of
climate change on the world economy. The results supported our own
analysis that climate change represents a significant threat and will likely
be inflationary, while short-termism hampers mitigation efforts.
Following our publication titled The impact of climate change on the
global economy we sought to extend our analysis on climate change by
capturing the views of a selection of investment banks (sell-side economists). In doing so, we constructed a survey
aimed at addressing some key questions on how climate change may impact the global economy. The surveys main
findings suggest:

Climate change represents a significant threat to the global economy in the current century.

A disproportionate amount of the economic costs associated with climate change are likely to be felt in emerging
markets, given their reduced ability to deal with the challenges that climate change may bring.

Climate change will have an inflationary impact on the world economy. Higher food and water prices, rising
energy costs and the more widespread introduction of carbon taxes are a handful of factors that are expected to
drive inflation higher.

Fear of disadvantaging the domestic economy in an international context is the leading reason that prevents
further policy action to mitigate climate change risks.

However, it should be noted that the response rate to the survey was low at around 25% and, whilst some respondents
were constrained, this suggests that the economics community in investment banking and broking is yet to fully focus on
the impact of climate change. Furthermore, even among those who did respond, some did not incorporate climate change
into their forecasting process. Uncertainty about the overall effects and the long time horizons involved were cited as
reasons for the lack of inclusion, rather than denying there would be any effect. Nonetheless, this is surprising given the
significant amounts of capital tied up in sectors such as energy and insurance (which will be affected) and the increase in
investor awareness of the issue.
Below we present the results of the survey. The topics covered include how climate change will affect global growth and
inflation, regional economic performance and sectors of the global economy. We also explore a handful of forces that act
as headwinds to the introduction of policies designed to mitigate climate change.
Climate change represents a significant threat to the global economy
The survey shows that respondents are concerned that climate change will threaten the global economy in the medium to
long term; all respondents believed it represents either a significant or extremely significant threat to the global economy
in the coming century (Figure 1).

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Figure 1: To what extent do you believe the risk of climate change poses a threat to the global economy in the
current century if no further action is taken to limit global warming?

Source: Schroders Economics Group Climate Change Survey 2016.

Whilst there was a general consensus that global warming poses a risk to the world economy, respondents failed to
agree for the most part on when climate change will begin to have a net negative impact on output. Several economists
are of the opinion that climate change is already having a negative influence overall, whereas others believe the impacts
will be adverse around the middle of this century. Interestingly, several respondents believed climate change would
eventually have a positive influence on the world economy. In their view, the adoption of new technology provides an
opportunity to spur economic activity in the long run.
The channels through which climate change is expected to influence global activity are vast. We asked our survey
respondents to rank the top three ways in which global warming will negatively impact global GDP. Extreme weather and
flood-related damage are expected to have the greatest adverse affect on GDP through the degradation of the capital
stock (Figure 2). Mass migration and the resulting security threats are also forecast to weigh on GDP if global warming
continues. Other reasons why global activity may become impaired due to climate change include the reduction in the
overall size of the workforce due to higher mortality rates, together with the increased prevalence of pricing negative
externalities and policy responses (such as energy taxes). In the case of the latter, one respondent stated "policy
responses to combat climate change are likely to carry a short-term cost, albeit for a long-term gain".
Figure 2: Please rank the following channels by the expected magnitude in which they may negatively affect
global GDP as a consequence of climate change.

Source: Schroders Economics Group Climate Change Survey 2016. *Categories taken from our publication The Impact of Climate
Change on the Global Economy.
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Climate change is likely to be inflationary

We also asked our panel whether climate change will act as an inflationary or deflationary force on the world economy,
assuming no further major governmental action to tackle it. In response, 80% of respondents believed global warming
would add to inflationary pressures. The remaining 20% were unsure as to its effects. Inflation (or deflation) as a
consequence of climate change may manifest itself via a number of channels and, digging deeper, we asked economists
what their expectation was across five potential channels. The results can be found below.
Figure 3: Based on your expectations of how climate change will impact the following variables, please specify
whether the impact will be inflationary or deflationary.

Source: Schroders Economics Group Climate Change Survey 2016.

As shown in Figure 3, there was an agreement across the board that insurance costs are likely to contribute to higher
inflation. The vast majority of respondents also believe that food and water prices will likely rise in the future due to
climate change. Also worth noting is the bias towards the cost of energy rising rather than falling in the future. Finally,
economists were least sure on how global warming will impact wage costs, with just 20% of respondents thinking wage
costs will increase. The remainder of the sample were unsure.
Emerging markets look most vulnerable to global warming
The economic costs associated with climate change are unlikely to be distributed evenly across the globe. One
respondent summarised this by stating that they see "climate change as a negative for the global economy, but there will
be winners and losers". We asked our panel whether developed or emerging markets will experience the greatest
economic costs (as a percentage of GDP) in the 21st century due to climate change. The resounding answer was that
emerging market economies will bear a disproportionate burden. The brain drain effect, an inability to deal with disease
outbreaks and limited financial means to address the costs of climate change were several reasons why emerging
countries look vulnerable to climate change.
More specifically, Asia and Africa are particularly exposed based on the survey results. According to one economist,
"Asia appears most vulnerable to flooding from higher rainfall while low lying areas will suffer from a rise in sea levels".
According to another correspondent, Asia "has limited ability to cope" with climate change having "high degrees of human
vulnerability and environmental stress levels".
Oil & gas and utilities companies likely to be most unfavourably impacted
Using Bloomberg's industry classification of the S&P 500, we asked which sectors of the global economy will be
disadvantaged by climate change in the 21st century. Over 50% of correspondents believed all 10 sectors would in some
form be influenced negatively. This demonstrates the widespread impact climate change is expected to have in the
future. However the results do show that economists have less conviction that climate change will impact the
telecommunications and technology sectors. In addition, we asked which sector will be most affected. Whilst there was
dispersion in the results, a common answer was that both the oil & gas and utilities sectors will be impaired by the
greatest degree. One participant noted "heavy emission industries as the most impacted" for example.
Risks to international competitiveness hinder effective policy setting
Many believe that governments are not acting with sufficient haste or force to make a material change to the predicted
emission pathway for the world economy. With this in mind, we asked our survey participants to rank the top three factors
that deter policies designed to tackle climate change. The highest ranked responses can be seen below in Figure 4.

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Figure 4: Please rank the top three factors you see as being the greatest barriers to the development of policies
designed to mitigate the risks associated with climate change.

Source: Schroders Economics Group Climate Change Survey 2016.

It is clear that economists believe regulation linked to climate change is a sufficient threat to international competitiveness
that it stands in the way of further progress in tackling climate change. Fearing that regulation will dampen
competitiveness in any given economy, governments have little incentive to introduce climate related policies in the short
to medium term. This leads us on to the second greatest barrier to tackling climate change. The long time period over
which the costs are forecast to arise is perceived to act as a hindrance to the mitigation progress. In essence, short
termism amongst governments and the private sector creates little motivation to act now in order to prevent further losses
in the future.
Finally, the high degree of variance in estimates of climate related economic damage is believed to detract from
successful policy intervention. Such variance leads to a lack of conviction as to the extent to which global warming may
be harmful to the world economy. This trend was apparent when we asked our panel to choose the most accurate
depiction of how global GDP will be harmed as global temperatures rise. Choosing between three separate damage
functions, which estimate world GDP loss relative to degrees of warming, the majority of our surveyed panel were unsure
which function most accurately represented the potential climate related economic damages.
Survey results chime with our analysis
Broadly speaking, many of the conclusions drawn from the survey are in line with our findings detailed in our paper The
impact of climate change on the global economy. Namely, the survey results reinforced our belief that climate change
represents a significant threat that is likely to weigh on economic growth in the long run.
There was also further agreement as to how climate change will manifest itself into lower output. In our prior publication,
we highlighted that capital stock is at risk of damage from severe weather. On average, our survey participants ranked
this risk as potentially the most damaging factor to global GDP. We also believe labour productivity is likely to be
hampered through climate linked illnesses. Along similar lines to this, one respondent cited "a reduction in total workforce
size due to higher mortality rates from health impairments" as a reason for potentially lower world GDP. Finally, policy
responses to prevent climate change were thought to reduce output, particularly in the short run, according to several
economists in the survey. From our own research, we found that aggressive policy responses may carry short term costs
but, compared to not acting at least, the costs would most likely be small.
Our prior publication also highlighted that climate change would create inflationary pressures in the global economy. Our
survey respondents were largely of the same belief. In line with our thinking, insurance costs, food and water prices, and
energy bills are expected to increase due to global warming. Furthermore we expect that rising sea levels and higher
average temperatures will gradually reduce the amount of available hospitable land, driving the cost of land higher. In
general there was support for this view but to a lesser degree than the previously mentioned factors.
With regards to regional disparities, it was clear that economists thought emerging markets were at greater economic risk
than developed countries regarding climate change. We believe this to be correct based on a number of reasons. Firstly,
developing countries typically rely more heavily on agriculture, a sector highly sensitive to changes in climatic conditions.
Adding to this, having less fiscal manoeuvrability to both adapt and adjust to the economic damages climate change may
bring, makes developing countries particularly vulnerable.

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Our prior assessment of climate change recognised that a collective agreement amongst governments and corporations
will be needed to mitigate material further warming. In practice this is difficult to achieve. Fear of disadvantaging the local
economy through regulatory implementation was a reason cited by the majority of survey respondents as the greatest
barrier to effective policy action. Such a factor highlights the difficulty in reaching a global agreement to climate change.
Despite this, the recent 'Paris Agreement' formed during the COP21 meeting in France does mark a step in the right
direction for collective policy making. Offsetting this is the current low oil price. With the price of oil collapsing in much of
2015, there is less of an incentive to invest in green technology in order to reduce emissions.
Investment community must incorporate climate change risk into their analysis
We would like to thank all those who participated in the survey. We appreciate both the time and effort that went in to
completing the questionnaire; the detailed answers many respondents gave provided a useful insight into a thought
provoking topic that is likely to garner further interest in the near future. As climate change becomes an ever greater
threat to the global economy, we expect an increasing amount of intellectual capital will be devoted to the subject.
Climate change is yet to become fully recognised amongst the investment community as a risk to both the economy and
asset prices alike. As evidence of climate change becomes more apparent, and its effects more extreme, investors will
need to instil a climate change risk element into their investment framework. Shareholders have a role to play in tackling
global warming by taking a more active approach but, like governments, tend to be judged over the short term and so
new means must be sought to extend investors time horizons. In terms of our own analysis, we will be looking to
incorporate climate change effects in our medium term forecasts for economies and markets.

Appendix
The survey was sent to a collection of 18 investment banks and brokerage firms in December 2015. Over approximately
two weeks we received five responses, equivalent to a 28% response rate. The response rate to the questions within the
survey was generally high, aside from the optional questions concerning climate change impacts on asset prices and
methods to reduce greenhouse gas emissions. For these questions, the response rate was 60%.

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