The world is headed for another global financial crisis unless the risk of climate change is properly considered, former Liberal leader John Hewson has warned.

Key points: Climate change-related disaster can harm company's assets, Hewson says

Climate change-related disaster can harm company's assets, Hewson says His claims are supported by London School of Economics' study

His claims are supported by London School of Economics' study Researchers say up to $31.53 trillion is at risk if threat ignored

Professor Hewson, now Professorial Fellow in economics at the Australian National University, is chair of the Asset Owners Disclosure Project, which surveys global companies on their climate change risk and management.

"In our work, only 7 per cent of the top 500 asset owners of the world of our last year's survey could actually measure the climate risks that they were running. And only about 1.5 per cent actually had a strategy for managing those risks," he said.

"In my view, financial markets consistently underprice risk. They don't particularly understand it and they underprice it."

He said there was a risk that:

climate change-related disaster could physically harm a company's asset; or

climate change-related disaster could physically harm a company's asset; or the Government could introduce policies to mitigate climate change, shifting the investment landscape; or

the Government could introduce policies to mitigate climate change, shifting the investment landscape; or a new technology to address climate change may radically change the economic order.

"Some combination of those three could easily precipitate a financial crisis, which sees the value of many assets fall," Professor Hewson said.

He said the market was just starting to understand the scale of the risk it was exposed to.

"The stock market has reacted to some extent but nowhere near enough. We're not recognising the extent of the risk being run by major financial institutions, in particular pension and superannuation funds," he said.

With Australians required to invest at least 9 per cent of their income into super, the problem had the potential to affect all Australians and spin out to all areas of the economy.

"There are also systemic risks because the linkages across various types of institutions and financial markets and so on are very significant and are not well understood," he said.

Up to $31.53 trillion at risk

It is not the first time Professor Hewson has warned of the risks of climate change to institutional investment. This time he has support from a new study.

Researchers at the London School of Economics (LSE) released a study which found that $3.28 trillion could be at risk because climate change had not been properly considered.

In comparison, the world's oil, coal and gas assets are valued at $6.57 trillion.

"One has to, of course, bear in mind that it's just an economic model, and as a famous statistician once said, all models are wrong, but some models are useful," Professor Simon Dietz, a director of the Grantham Research Institute at the LSE, said.

"But it implies that the value today should be written down by that amount."

The researchers' most pessimistic scenario has the assets overvalued to the tune of $31.53 trillion.

Conversely, if the world acts to keep global warming from exceeding 2 degrees Celsius — as the world agreed in a global meeting in Paris last year — then financial assets are in fact undervalued. They would be worth 0.2 per cent more than currently.

"I think most people would agree — particularly as far as the worst case scenario is concerned — these are large numbers. And these are risks that financial regulators and long-term investors would seek to manage," Professor Dietz said.

He said super funds in particular, with their long-term horizons, needed to keep on top of the potential risk to their assets.

"They need to worry about whether climate change could reduce the long-term performance of their investments, and therefore make it more difficult for them to meet their liabilities in the future to people who are retiring," he said.

He advised people to stick with superannuation but to ask questions of their fund.

"People who have pensions should be encouraging their funds to look into these issues and to manage them appropriately," Professor Dietz said.

The paper appeared in the journal Nature Climate Change today.