In 2024, climate catastrophes cost the global economy $320bn. This was 30% higher than the year before, making it the most expensive year on record for natural disasters. As devastating wildfires burn in Los Angeles, 2025 could prove to be even dearer.
Climate change has intensified the dangers of wildfires, meaning disaster events are more likely to occur outside of the typical wildfire season. With global temperatures exceeding an increase of 1.5 degrees Celsius in 2024, this is only going to become more difficult to mitigate and adapt to.
JP Morgan estimates that the economic cost of the LA wildfires will total around $50bn. However, only $20bn of this will be insured, meaning there is a significant protection gap. In recent years, as wildfires have become bigger and harder to control, many insurers have decided against offering protection in high-risk areas, which has exacerbated the economic burden for many Americans.
What will Trump do?
US President Donald Trump has been vocal about his scepticism of the threat climate change poses, labelling it a ‘hoax’ and ‘one of the great scams of all time’ during his campaign in 2024. In his first term, he withdrew the US from the 2015 Paris agreement in a major setback to efforts to curb the country’s emissions.
He has vowed in his second term to repeal environmental rules introduced by the Joe Biden administration, end public spending on clean energy, scrap incentives for Americans to buy electric vehicles and embark on a ‘drill, baby, drill’ drive for new fossil fuel energy. On his first day in office, he once again withdrew the US from the Paris agreement and halted more than $300bn in green infrastructure funding as part of his plan to undo the progress made by Biden’s team.
This will have drastic implications for transition finance. A move towards greater de-regulation will override much of the Biden administration’s important work to hold industries to account for their emissions and counter the risk of greenwashing through disclosure requirements. There has already been a widespread retreat of banks and asset managers from many of the frameworks and alliances that were established following COP26 in 2021.
Since the 5 November election, all six of the largest US banks – Bank of America, Citigroup, Goldman Sachs, JP Morgan, Morgan Stanley and Wells Fargo – have withdrawn from the Net-Zero Banking Alliance. BlackRock, the world’s largest asset manager, has left Net Zero Asset Managers, the equivalent organisation for money managers. And just a few days after Trump took office, the Federal Reserve left the Network for Greening the Financial System in a blow to central bank net-zero efforts.
In OMFIF’s Global Public Funds 2024, not a single survey respondent chose climate change when asked to identify the top three economic factors affecting their investment approach over the next five to 10 years. In 2023, it was chosen by 50% of respondents, which shows a clear shift in public pension and sovereign funds’ concerns over the medium term.
It is disappointing, but not surprising, that the political climate of the US is able to exert such influence over a crucial part of the fight to meet net zero. Just four years after these banks and asset managers declared ‘climate risk is investment risk’, these alliances are beginning to crumble and pledges are being sidelined.
US will fall behind
Despite the progress made by the Biden administration in attempting to regulate and standardise frameworks and disclosure requirements, the US still trailed Europe in action on climate change. A report by OMFIF and Luxembourg for Finance in 2022 found that ‘the US still looks to Europe for guidance on ESG regulation and lags in green equity development’. With transition finance set to be bumped down the list of priorities, it stands to reason that the gap between the two jurisdictions will soon become a gulf.
Elsewhere, China is looking to assume a leading role in the clean energy transition, hoping to dominate the market in the next phase of green innovation. It is already the world’s largest producer of solar energy and it has set its sights on the EV industry.
Trump has spoken of his plans to slap up to 100% tariffs on Chinese goods, in addition to the 100% tariff that already exists on Chinese-made EVs. Given Trump’s hostility towards both climate change and China, it may be safe to assume that Chinese green technology won’t be making its way into the US any time soon.
However, China’s dominance in this field, and the business it will do with the rest of the world, may make some US business leaders rethink a reluctance to engage with the transition. Could a healthy dose of competition be enough to pull the US back into the net-zero game?
Regardless of the cause of the wildfires, Trump will be unable to ignore the economic devastation wrought across LA. In a fraught political environment, Democrats and Republicans will have to reach across the divide to help those who have lost everything. Even more importantly, they will have to work together to prevent a catastrophe on this scale from happening again.
Sarah Moloney is Chief Subeditor at OMFIF.
Image credit: Daria Devyatkina
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