Climate risk and response: physical hazards and socioeconomic impacts

How could earth’s changing climate impact socioeconomic systems across the world in the next several decades?

By Jonathan Woetzel

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. In this article, 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.

The planet’s temperature has risen by about 1.1 degrees Celsius on average since the 1880s. This has been confirmed by both satellite measurements and by the analysis of hundreds of thousands of independent weather station observations from across the globe. Scientists find that the rapid decline in the planet’s surface ice cover provides further evidence. This rate of warming is at least an order of magnitude faster than any found in the past 65 million years of paleoclimate records.

The average conceals more dramatic changes at the extremes. In statistical terms, distributions of temperature are shifting to the right (towards warmer temperatures) and broadening. That means the average day in many locations is now hotter (“shifting means”), and extremely hot days are becoming more likely (“fattening tails”). 

For example, the evolution of the distribution of observed average summer temperatures for each 100-by-100-kilometer square in the Northern Hemisphere shows that the mean summer temperature has increased over time. The share of the Northern Hemisphere (in square kilometres) that experiences an extremely hot summer—three-standard-deviation hotter average temperature in a given summer—has increased from zero to half a percent.

Averages also conceal wide spatial disparities. Over the same period that the Earth globally has warmed by 1.1 degrees, in southern parts of Africa and in the Arctic, average temperatures have risen by 0.2 and 0.5 degrees Celsius and by 4 to 4.3 degrees Celsius, respectively. In general, the land surface has warmed faster than the 1.1-degree global average, and the oceans, which have a higher heat capacity, have warmed less.

The affected regions will grow in number and size.

Looking forward, climate science tells us that further warming is unavoidable over the next decade at least, and in all likelihood beyond. With increases in global average temperatures, climate models indicate a rise in climate hazards globally. These models find that further warming will continue to increase the frequency and/or severity of acute climate hazards and further intensify
chronic hazards.

Climate change affects human life as well as the factors of production on which our economic activity is based. We measure the impact of climate change by the extent to which it could disrupt or destroy human life, as well as physical and natural capital.

Climate change is already having a measurable socioeconomic impact and we group these impacts in a five-systems framework. This impact framework is our best effort to capture the range of socioeconomic impacts from physical climate hazards.

Livability and workability

Hazards like heat stress could affect the ability of human beings to work outdoors or, in extreme cases, could put human lives at risk. Increased temperatures could also shift disease vectors and thus affect human health.

Food systems

Food production could be disrupted as drought conditions, extreme temperatures, or floods affect land and crops, though a changing climate could improve food system performance in some regions.

Physical assets

Physical assets like buildings could be damaged or destroyed by extreme precipitation, tidal flooding, forest fires, and other hazards.

Infrastructure services

Infrastructure assets are a particular type of physical asset that could be destroyed or disrupted in their functioning, leading to a decline in the services they provide or a rise in the cost of these services. This in turn can have knock-on effects on other sectors that rely on these infrastructure assets.

Natural capital

Climate change is shifting ecosystems and destroying forms of natural capital such as glaciers, forests, and ocean ecosystems, which provide important services to human communities. This in turn imperils the human habitat and economic activity.

Physical climate impacts are spreading across regions, even as the hazards and their impacts grow more intense within regions. Most of the increase in direct impact from climate hazards to date has come from greater exposure to hazards rather than from increases in the mean and tail intensity of hazards. In the future, hazard intensification will likely assume a greater role.

While all countries are affected by climate change, the poorest countries could be more exposed, as they often have climates closer to dangerous physical thresholds. They also rely more on outdoor work and natural capital and have less financial means to adapt quickly. The risk associated with the impact on workability from rising heat and humidity is one example of how poorer countries could be more vulnerable to climate hazards. 

When looking at the workability indicator (that is, the share of effective annual outdoor working hours lost to extreme heat and humidity), the top quartile of countries (based on GDP per capita) have an average increase in risk by 2050 of approximately 1 to 3 percentage points, whereas the bottom quartile faces an average increase in risk of about 5 to 10 percentage points. Lethal heat waves show less of a correlation with per capita GDP, but it is important to note that several of the most affected countries—Bangladesh, India, and Pakistan, to name a few—have relatively low per capita GDP levels.

In the face of these challenges, policy makers and business leaders will need to put in place the right tools, analytics, processes, and governance to properly assess climate risk, adapt to risk that is locked in, and decarbonize to reduce the further build-up of risk.

Much as thinking about information systems and cyber-risks has become integrated into corporate and public-sector decision making, climate change will also need to feature as a major factor in decisions. For companies, this will mean taking climate considerations into account when looking at capital allocation, development of products or services, and supply chain management, among others. For cities, a climate focus will become essential for urban planning decisions. 

Financial institutions could consider the risk in their portfolios. Developing a robust quantitative understanding is complex and will also require the use of new tools, metrics, and analytics. At the same time, opportunities from a changing climate will emerge and require consideration. These could arise from a change in the physical environment, such as new places for agricultural production, or for sectors like tourism, as well as through the use of new technologies and approaches to manage risk in a changing climate. One of the biggest challenges could stem from using the wrong models to quantify risk. These range from financial models used to make capital allocation decisions to engineering models used to design structures. For example, current models may not sufficiently take into account geospatial dimensions or assumptions could be based on historical precedent that no longer applies.

Societies have been adapting to the changing climate, but the pace and scale of adaptation will likely need to increase significantly. Key adaptation measures include protecting people and assets, building resilience, reducing exposure, and ensuring that appropriate financing and insurance are in place. Implementing adaptation measures could be challenging for many reasons. The economics of adaptation could worsen in some geographies over time, for example, those exposed to rising sea levels. Adaptation may face technical or other limits. In other instances, there could be hard trade-offs that need to be assessed, including who and what to protect and who and what to relocate.

While adaptation is now urgent and there are many adaptation opportunities, climate science shows us that the risk from further warming can only be stopped by achieving zero net greenhouse gas emissions. Decarbonization is not the focus of this research, however, decarbonization investments will need to be considered in parallel with adaptation investments, particularly in the transition to renewable energy. Stakeholders should consider assessing their decarbonization potential and opportunities from decarbonization.