The McKinsey Global Institute (MGI) and World Economic Forum (WEF) reports are highlighting the impact of climate change on business as a potent reminder of possible security threats in regions at the risk of conflict. MGI report focuses on investigating the impact of climate change on socio-economic systems in the next three decades. To understand the physical risk of climate change, MGI included nine cases from different sectors and regions, and consulted a range of literature and experts. The report concluded that climate change risks are growing and affecting five socio-economic systems: livability and workability, food systems, physical assets, infrastructure services, and natural capital.
WEF report also showed some alarming facts on the present and future impact of climate change on ecosystems, food and water, geopolitics and migration. The report highlighted the consequences of the rising temperatures and questioned whether stakeholders are ready to face a catastrophic impact. The report considered 2020 a crucial year to set concrete solutions to mitigate the impact of climate change.
McKinsey has a long history of research on topics related to the economics of climate change. Over the past decade, we have published a variety of research including a cost curve illustrating feasible approaches to abatement and reports on understanding the economics of adaptation and identifying the potential to improve resource productivity. This research builds on that work and focuses on understanding the nature and implications of physical climate risk in the next three decades.
We draw on climate model forecasts to showcase how the climate has changed and could continue to change, how a changing climate creates new risks and uncertainties, and what steps can be taken to best manage them. Climate impact research makes extensive use of scenarios. Four “Representative Concentration Pathways“ (RCPs) act as standardized inputs to climate models. They outline different atmospheric greenhouse gas concentration trajectories between 2005 and 2100. During their inception, RCPs were designed to collectively sample the range of then-probable future emission pathways, ranging from lower (RCP2.6) to higher (RCP 8.5) CO2 concentrations. Each RCP was created by an independent modeling team and there is no consistent design of the socio-economic parameter assumptions used in the derivation of the RCPs. By 2100, the four RCPs lead to very different levels of warming, but the divergence is moderate out to 2050 and small to 2030. Since the research in this report is most concerned with understanding inherent physical risks, we have chosen to focus on the higher-emission scenario, i.e. RCP 8.5, because of the higher emissions, lower-mitigation scenario it portrays, in order to assess physical risk in absence of further decarbonization (Exhibit E1).
We focus on physical risk—that is, the risks arising from the physical effects of climate change, including the potential effects on people, communities, natural and physical capital, and economic activity, and the implications for companies, governments, financial institutions, and individuals. Physical risk is the fundamental driver of other climate risk types— transition risk and liability risk.2 We do not focus on transition risks, that is, impacts from decarbonization, or liability risks associated with climate change. While an understanding of decarbonization and the risk and opportunities it creates is a critical topic, this report contributes by exploring the nature and costs of ongoing climate change in the next one to three decades in the absence of decarbonization.
Our work offers both a call to action and a set of tools and methodologies to help assess the socioeconomic risks posed by climate change. We assess the socioeconomic risk from “acute” hazards, which are one-off events like floods or hurricanes, as well as from “chronic” hazards, which are long-term shifts in climate parameters like temperature.3 We look at two periods: between now and 2030 and from 2030 to 2050. In doing so, we have relied on climate hazard data from climate scientists and focused on establishing socioeconomic impact, given potential changes in climate hazards (see Box E1, “Our research methodology”). We develop a methodology to measure the risk from the changing climate and the uncertainties associated with these estimates (see Box E2, “How our methodology addresses uncertainties”). At the end of this executive summary, we highlight questions for stakeholders seeking to respond to the challenge of heightened physical climate risk (see Box E3, “Questions for individual stakeholders to consider”).
This part of the executive summary of World Economic Forum report “The Global Risks Report 2020 ” was first published on January 15, 2020.
Climate threats and accelerated biodiversity loss
Climate change is striking harder and more rapidly than many expected. The last five years are on track to be the warmest on record, natural disasters are becoming more intense and more frequent, and last year witnessed unprecedented extreme weather throughout the world. Alarmingly, global temperatures are on track to increase by at least 3°C towards the end of the century—twice what climate experts have warned is the limit to avoid the most severe economic, social and
environmental consequences. The nearterm impacts of climate change add up to a planetary emergency that will include loss of life, social and geopolitical tensions and negative economic impacts.
For the first time in the history of the Global Risks Perception Survey, environmental concerns dominate the top long-term risks by likelihood among members of the World Economic Forum’s multistakeholder community; three of the top five risks by impact are also environmental (see Figure I, The Evolving Risks Landscape 2007–2020). “Failure of climate change mitigation and adaption” is the number one risk by impact and number two by likelihood over the next 10 years, according to our survey. Members of the Global Shapers Community—the Forum’s younger constituents—show even more concern, ranking environmental issues as the top risks in both the short and long terms.
The Forum’s multistakeholder network rate “biodiversity loss” as the second most impactful and third most likely risk for the next decade. The current rate of extinction is tens to hundreds of times higher than the average over the past 10 million years—and it is accelerating. Biodiversity loss has critical implications for humanity, from the collapse of food and health systems to the disruption of entire supply chains.
You can find the document of MGI report here, and World Economic Forum global risks report here.
Photo credit: World Bank Photo Collection/ Flickr