The McKinsey Global Institute (MGI) has released a report titled “Climate Risk and Response,” which focuses on understanding the nature and extent of physical risk from climate change over the next three decades.
The report focuses on the physical risk, i.e., the risk from the physical effects of climate change, including the potential impact on people, communities, natural and physical capital, economic activity and the implications for companies, governments, financial institutions, and individuals.
The report takes into consideration six indicators to assess potential socioeconomic impact in 105 countries. It identified that climate change already has substantial physical implications at a local level in regions across the world and the affected regions will continue to grow in number and size.
The report looks at the impact of climate change on livability and workability in India and the Mediterranean; disruption of food systems through looking at global breadbaskets and African agriculture; physical asset destruction in residential real estate in Florida and supply chains for semiconductors and heavy rare earth metals; disruption of five types of infrastructure services and, in particular, the threat of flooding in urban areas; and destruction of natural capital through impacts on glaciers, oceans, and forests.
The report states that the socioeconomic impacts of climate change will likely be nonlinear as system thresholds are breached and have knock-on effects, implying that irreversible damage has been done to some socioeconomic systems like natural capital and that they cannot be fixed.
It also identified that the global socio-economic impacts of climate change could be substantial as climate change affects not only human beings, but also physical and, as previously mentioned, natural capital.
McKinsey suggested that financial markets could bring forward risk recognition in affected regions, with consequences for capital allocation and insurance. This falls in line with its next finding, which stated that countries and regions with lower per capita gross domestic product (GDP) levels are generally more at risk.
Also, it said that addressing physical climate risk will require more systematic risk management, accelerating adaptation, and decarbonization.
The study also shows how climate hazards could affect different socio-economic systems. It emphasized on five systems in particular – livability and workability, food systems, physical assets, infrastructure services, natural capital.
It showed that hazards like heat stress not only lowers human productivity because workers need to take breaks to avoid heat strokes, but it also could put human lives at risk. This could also cause a shift in the kinds of diseases that affect human health.
The report said that hot and humid countries like India and Pakistan are expected to become significantly hotter and more humid by 2050. It added that India might become one of the first places in the world to experience heat waves that cross the survivability threshold for a healthy human being resting in the shade.
It stated that as heat and humidity increase in India, under an Representative Concentration Pathway (RCP) 8.5 scenario, by 2030, between 160 million and 200 million people (of whom 80 million to 120 million people are estimated not to have air-conditioned homes) could live in regions with an average 5% annual probability of experiencing a heatwave that exceeds the survivability threshold for a healthy human being, absent an adaptation response.
The RCP 8.5 scenario predicts that global average warming of 2.3 degrees Celsius by 2050, compared with 1.8 degrees Celsius for RCP 4.5. Under RCP 4.5, 2.3 degrees Celsius warming would be reached in the year 2080.
Changes like these would threaten the lives of millions and make outdoor work, which accounts for about half of the GDP currently, much more challenging.
India is also expected to experience a net-negative agricultural impact from climate change. The country is expected to experience a 7% decrease in projected crop yields by 2050, while the probability of an over 10% decrease in annual yields in a given year would increase from 10% to 40% by 2050, according to the report.
Other countries that are at high risk to this are ones that are near the equator in Africa, Asia, and the Persian Gulf. These countries are characterized by extreme increases in heat and humidity impacts on workability, as well as a decrease in water stress.
Food systems could be disrupted because of drought conditions, extreme temperatures, and floods. Weather conditions play a drastic role in the performance of food systems. Climate change will introduce more volatility to the systems.
Weather volatility also has the potential to wreak havoc on physical assets like buildings. Extreme precipitation, tidal flooding, forest fires, and other havocs can wipe out significant parts of towns and cities. Rural and remote settlements are at higher risk of this.
Infrastructure services are another system that could fall prey to climate volatility. They could either be destroyed completely, crippled or wholly incapacitated. Power systems, for example, could become less productive in very hot weather conditions.
Natural capital like forests, glaciers, ocean ecosystems that provide essential services to human communities would start deteriorating, in turn directly affecting human and economic activity. Additionally, human mismanagement may also play a role in the loss of these systems.
The report discussed three steps that stakeholders could consider taking to provide an adequate response to the socioeconomic impacts of physical climate risk. It suggested the integration of climate risk into decision-making processes as currently, stakeholders might be underprepared to manage the impact of climate change.
Decision-making processes need to reflect these characteristics. For example, companies will have to take climate considerations into account when looking at capital allocation, development of products or services, supply-chain management, among others. Cities must bring about an element of climate change focus on their urban planning decisions.
The second step suggested was accelerating the pace and scale of adaption. While societies have been adapting to climate change, the speed and scale of adaptation will likely need to increase significantly. These measures should include protecting people and assets, building resilience, reducing exposure, and ensuring that appropriate insurance and financing are in place.
McKinsey added that supporting socioeconomic development in a manner that incorporates recognizing the risk of climate change is also crucial. For example, by shifting the basis of economic development of extreme heat-prone regions from outdoor work to urban indoor environments would be a good start.
The final step was to promote decarbonization at larger scales. While the report did not present an assessment or roadmap for this, it stated that the next decade of human existence on the planet is highly dependent on the cumulative amount of carbon dioxide that is added to the atmosphere.
The report said that decarbonization investments would need to be considered in parallel with adaptation investments, particularly in the transition to renewable energy, which plays a vital role in achieving zero net greenhouse gas emissions.
The report concluded that since physical climate affects everyone, either directly or indirectly, responding to it adequately would require careful translation of climate science into risk assessments at a time when old models of assessing and managing risk are losing relevance.
In 2018, the World Bank pledged a corpus of $200 billion for climate action for over five years. The World Bank has set this corpus to meet climate targets set by it for the period 2021-2025. The new corpus of $200 billion for the period beginning 2021 and ending 2025 is twice the World Bank’s current five-year investments in support for countries to take ambitious climate action.
Previously, Mercom reported that between the financial year 2014-15 to 2017-2018, the Indian government spent a corpus of ₹140.14 billion ($1.96 billion) to fight climate change. The corpus was spent on implementing the National Action Plan on Climate Change (NAPCC).
On October 2, 2016, India became the 62nd country to ratify the Paris Agreement. India has set a goal of generating 40 percent of its electricity from renewable energy sources as part of its plan.
Nithin is a staff reporter at Mercom India. Previously with Reuters News, he has covered oil, metals and agricultural commodity markets across global markets. He has also covered refinery and pipeline explosions, oil and gas leaks, Atlantic region hurricane developments, and other natural disasters. Nithin holds a Masters Degree in Applied Economics from Christ University, Bangalore and a Bachelor’s Degree in Commerce from Loyola College, Chennai.