What’s your house worth?

If we were at a dinner party, you’d have every right to roll your eyes and head for the canapes. But this is about climate change, folks, I promise – so humour me. What is your home worth, and how do you know?

Whatever the final figure, I’m sure you’ll be thinking about the number of bedrooms, those period fireplaces, and what your neighbour got for their place last year. And let’s be honest, your place is just that little bit nicer than your neighbours. 

And if all else fails, you can always burn it down for the insurance, right?

The market is on fire!

Not if you live in parts of California. The cataclysmic wildfires of recent years have seen more and more insurers pack up their trucks, hoist their elderly shareholders upon their backs and flee the state altogether. Hundreds of thousands of properties are now hit with non-renewal notices each year, a situation so politically fraught that the state government actually issued a moratorium on policy cancellations during the 2022 season. That’s right – the government forced business to write unprofitable business.

Or perhaps you live in coastal Florida, where Hurricane Ian in 2022 – a $50bn event, second only to Katrina – simply bankrupted insurers. But there is history here: well over a dozen have gone bust since 2020, with 30 more on regulators' watchlists. Many are wondering if Florida will have a functioning insurance market – or a property market – in the future at all. 

California and Florida dominate the headlines in the US, but they are hardly outliers. 40% of the population lives in coastal counties and 10% on designated floodplains. Another 16% live in wildfire zones. What happens to all that property as climate change ratchets up extreme weather, those at-risk zones spread across the continent, and insurers disappear en masse?

Hurricanes and wildfires are the poster children for climate change; if you’re reading this, you’re well aware of the connection. What is more interesting to me is what these examples suggest about a more profound question – what does long-term value actually mean in the climate age?

Rethinking long-term value

The long-term value of a business is calculated as the total present value of all future cash flows. That is what textbooks and business schools taught throughout the twentieth century – but we’re not in the twentieth century anymore. When it comes to the question of value, climate change changes everything.

To return to our original question, what is the value of an uninsurable property? In the long run: zero. Lightning – or flood or fire for that matter – only needs to strike once, and over a long-enough span of time, it will.

Similarly, what is the value of an uninsurable business? If the bank won’t extend credit against its assets; when its customers don’t know if their home has any value; and the government doesn’t know if it can replace key infrastructure… what’s it all worth?

Extreme weather events are the most obvious driver of climate chaos when it comes to valuations. But all the other impacts of climate change – across health, food systems, migration, supply chains, political cohesion, and so on – bring existing valuations into question in more subtle ways. 

The bottom line on climate repricing

One way to think about it is that the final backstop for the costs of climate will be the government, which ultimately means all of us. Through drastically higher taxes or reduced services, societies will end up paying for those externalities they ignore today. What happens to business valuations – those extrapolated cash flows – when climate inflation and taxation start showing up in your cost base, and that of your customers?

Next, consider that the natural response to the arrival of these crushing new costs will be to revoke the social license of anything that would compound them. From poisonous food to cheap plastic goods to addictive digital media, any business activities that load other non-carbon costs onto society will see themselves regulated out of existence. 

And those that survive the chronic squeeze will face acute shocks. Climate change will create the mother of all rolling financial crises, as every asset on the planet goes through profound repricing. 2008 brought the banking system to its knees just by fiddling around with US mortgage-backed securities; but as the dust settled, plenty of people made a fortune buying up solid assets at foreclosure prices. Now imagine 2008 if the value of those properties was actually marked to zero! 

That is just one housing market. What about all the world’s debt backed by assets that rely on a fossil-fuelled world, priced for nothing to change? This isn’t just abstract musing: everyone from Nobel Laureates to the BIS to the Feds is suddenly treating climate-induced financial crises as a real threat.

If you value it, act now

The twentieth century trained us to think about long-term value as though tomorrow will always look like today – just slightly richer. Climate change sets that idea on fire. Every asset in the world faces radical repricing unless we get serious about solving our environmental crises.

Surely nothing – literally, the number zero – could be more motivating.