Climate risk and response: Physical hazards and socioeconomic impacts

Courtesy of McKinsey & Company

By Jonathan Woetzel, Dickon Pinner, Hamid Samandari, Hauke Engel, Mekala Krishnan, Brodie Boland, and Carter Powis

Note: The following is an excerpt from the “Climate risk and response: Physical hazards and socioeconomic impacts” article. To read the full article, please visit https://www.mckinsey.com/business-functions/sustainability/our-insights/climate-risk-and-response-physical-hazards-and-socioeconomic-impacts

After more than 10,000 years of relative stability—the full span of human civilization—the Earth’s climate is changing. As average temperatures rise, climate science finds that acute hazards such as heat waves and floods grow in frequency and severity, and chronic hazards, such as drought and rising sea levels, intensify (Exhibit 1). In this report, we focus on understanding the nature and extent of physical risk from a changing climate over the next one to three decades, exploring physical risk as it is the basis of both transition and liability risks.

Exhibition 1

We estimate inherent physical risk, absent adaptation and mitigation, to assess the magnitude of the challenge and highlight the case for action. Climate science makes extensive use of scenarios ranging from lower (Representative Concentration Pathway 2.6) to higher (RCP 8.5) CO2 concentrations. We have chosen to focus on RCP 8.5, because the higher-emission scenario it portrays enables us to assess physical risk in the absence of further decarbonization. (For more details click on “Our research methodology”). In this report, we link climate models with economic projections to examine nine cases that illustrate exposure to climate change extremes and proximity to physical thresholds. A separate geospatial assessment examines six indicators to assess potential socioeconomic impact in 105 countries. We also provide decision makers with a new framework and methodology to estimate risks in their own specific context. 

Table of Contents

1) Seven characteristics of physical climate risk stand out

2) Climate change is already having substantial physical impacts in regions across the world

3) Socioeconomic impacts will likely be nonlinear and have knock-on effects

4) Global socioeconomic impacts could be substantial

5) Countries with lower GDP per capita levels are generally more exposed

6) What can decision makers do?

Part 1 

Seven characteristics of physical climate risk stand out

We find that physical risk from a changing climate is already present and growing. Seven characteristics stand out. Physical climate risk is:

Increasing: In each of our nine cases, the level of physical climate risk increases by 2030 and further by 2050. Across our cases, we find increases in socioeconomic impact of between roughly two and 20 times by 2050 versus today’s levels. We also find physical climate risks are increasing across our global country analysis even as some countries find some benefits (such as expected increase in agricultural yields in countries such as Canada).

Spatial: Climate hazards manifest locally. The direct impacts of physical climate risk thus need to be understood in the context of a geographically defined area. There are variations between countries and within countries.

Non-stationary: As the Earth continues to warm, physical climate risk is ever-changing or non-stationary. Further warming is “locked in” for the next decade because of physical inertia in the geophysical system. Climate science tells us that further warming and risk increase can only be stopped by achieving zero net greenhouse gas emissions. Furthermore, given the thermal inertia of the earth system, some amount of warming will also likely occur after net-zero emissions are reached.

Nonlinear: Socioeconomic impacts are likely to propagate in a nonlinear way as hazards reach thresholds beyond which the affected physiological, human-made, or ecological systems work less well or break down and stop working altogether. This is because such systems have evolved or been optimized over time for historical climates (Exhibit 2).

Systemic: While the direct impact from climate change is local, it can have knock-on effects across regions and sectors, through interconnected socioeconomic and financial systems.

Regressive: The poorest communities and populations within each of our cases typically are the most vulnerable. Climate risk creates spatial inequality, as it may simultaneously benefit some regions while hurting others.

Under-prepared: While companies and communities have been adapting to reduce climate risk, the pace and scale of adaptation are likely to need to significantly increase to manage rising levels of physical climate risk. Adaptation is likely to entail rising costs and tough choices that may include whether to invest in hardening or relocate people and assets. 

To read the full article, please visit https://www.mckinsey.com/business-functions/sustainability/our-insights/climate-risk-and-response-physical-hazards-and-socioeconomic-impacts