Dickon Pinner is a senior partner in McKinsey’s San Francisco office. 42–44. By 2050, under an RCP 8.5 scenario, the number of people living in areas with a nonzero chance of lethal heat waves would rise from zero today to between 700 million and 1.2 billion (not factoring in air conditioner penetration). These models find that further warming will continue to increase the frequency and/or severity of acute climate hazards and further intensify chronic hazards (Exhibit 4). They also rely more on outdoor work and natural capital and have less financial means to adapt quickly. Global geospatial analysis. The intensification of climate hazards across regions will bring areas hitherto unexposed to impacts into new risk territory. 14 Oct 2020. The TCFD defines four key management disciplines through which companies are expected to address climate change: governance, strategy, risk management, metrics and targets (figure 3). Key findings from our cases include: 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. PwC has in-depth expertise in climate change and sustainability, governance and strategy, risk and change management, technology, reporting and assurance. These range from financial models used to make capital allocation decisions to engineering models used to design structures. For example, as heat and humidity increase in India, by 2030 under an RCP 8.5 scenario, between 160 million and 200 million people could live in regions with a 5 percent average annual probability of experiencing a heat wave that exceeds the survivability threshold for a healthy human being, absent an adaptation response. While we seek to include a wide range of risks and as many countries as possible, there are some we could not cover due to data limitations (for example, the impact of forest fires and storm surges). For the people living in these regions, the average annual likelihood of experiencing such a heat wave is projected to rise to 14 percent by 2050. Seven characteristics stand out. 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. collaboration with select social media and trusted analytics partners A Mediterranean basin without a Mediterranean climate? Please email us at: As the Earth warms, the spatial extent and share of time spent in drought is expected to increase, rising to greater than 80 percent in parts of the world by 2050, notably the Mediterranean, southern Africa, and Central and South America. While many scientists, including climate scientists, are employed at McKinsey & Company, we are not a climate modeling institution. Risk recognition could trigger capital reallocation and asset repricing and indicates the presence of systemic risk. Our flagship business publication has been defining and informing the senior-management agenda since 1964. Of the four, we’ve chosen the one we think is best to monitor and manage climate risks and opportunities in investment portfolios. We use cookies essential for this site to function well. Climate science tells us that further warming and risk increase can only be stopped by achieving zero net greenhouse gas emissions. 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 (Exhibit 3). In order to link physical climate risk to socioeconomic impact, we investigate nine specific cases where climate change extremes are measurable. McKinsey Insights - Get our latest thinking on your iPhone, iPad, or Android device. Use minimal essential The UK PRA expects insurance companies to provide the board and relevant sub-committees with management information on their exposure to financial risks from climate change. How will African farmers adjust to changing patterns of precipitation? © National Geographic. For example, by 2050, the annual probability of a 10 percent or more reduction in yields for wheat, corn, soy, and rice in a given year is. Brodie Boland is an associate partner in the Washington office. Following standard practice, our findings are therefore framed as “statistically expected values”—the statistically expected average impact across a range of probabilities of higher or lower climate outcomes. hereLearn more about cookies, Opens in new Can coastal cities turn the tide on climate risk? Please try again later. Describe the organisation’s process for managing climate-related risks. While we attempt to draw out qualitatively (and, to the extent possible, quantitatively) the knock-on effects from direct physical impacts of climate change, we recognize the limitations of this exercise given the complexity of socioeconomic systems. ASIC investigating large companies' climate change risk management. Climate Risk Management. In a separate analysis, we use geospatial data to provide a perspective on climate change across 105 countries over the next 30 years. We ultimately chose nine cases to reflect these systems and based on their exposure to the extremes of climate change and their proximity today to key physiological, human-made, and ecological thresholds. a risk management strategy.14 To address this data gap, Four Twenty Seven, a market intelligence company specializing in analysis of the phys-ical risk of climate change, has developed a model that leverages global climate data to provide asset-level risk assessments of corporations and score public equities’ exposure to climate change impacts. risk management frameworks. We use cookies to provide necessary site functionality and improve your online experience. At the same time, opportunities from a changing climate will emerge and require consideration. Overall, our cases highlight a wide range of vulnerabilities to the changing climate. All our lethal heatwave projections are subject to uncertainty related to the future behavior of atmospheric aerosols and urban heat island or cooling island effects). Here, we highlight key methodological choices: Choice of climate scenario. For each of our cases, we identify possible adaptation responses. We find that physical risk from a changing climate is already present and growing. Can coastal cities turn the tide on climate risk? We note the critical role of decarbonization in a climate risk management approach but a detailed discussion of decarbonization is beyond the scope of this report. Will infrastructure bend or break under climate stress? We believe that managing climate change as an issue should be integrated into existing governance … Learn more about cookies, Opens in new By 2030, the average number of lost daylight working hours in India could increase to the point where between 2.5 and 4.5 percent of GDP could be at risk annually, according to our estimates. A Mediterranean basin without a Mediterranean climate? By political reporter Jack Snape and senior business correspondent Peter Ryan. Risk management. The general approach to climate change risk management is the same for all kinds of organisations, although there may be differences in detail. 0903c02a8265a69e. These assessments, often strategic in nature, now need to expand to include quantitative risk analyses, integrated into existing risk management frameworks. Weighted average carbon intensity relies on carbon footprint analysis, an important starting point that itself has limitations. Subscribed to {PRACTICE_NAME} email alerts. This can af… Warming is “locked in” for the next decade because of physical inertia in the geophysical system. 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. Prior research has argued that companies are likely to employ a conventional three stage risk management process to deal with climate risks ( Weinhofer and Busch, 2013 ). The Guide describes how the routine application of the Standard can be extended to include the risks generated by climate … Unleash their potential. Something went wrong. Companies report financial impact of climate risk. Four broad metrics exist to measure an investment portfolio’s carbon footprint—an important starting point in understanding a portfolio’s exposure to climate risks. Could climate become the weak link in your supply chain? Our mission is to help leaders in multiple sectors develop a deeper understanding of the global economy. Garton cited a recent case in the US where a company’s internal assessments of its climate risk varied significantly from what it was telling the markets and regulators. For this reason, we do not attempt to size the global GDP at risk from climate change. Regressive: The poorest communities and populations within each of our cases typically are the most vulnerable. Implementing adaptation measures could be challenging for many reasons. Climate science tells us that further warming and risk increase can only be stopped by achieving zero net greenhouse gas emissions. 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. Integrating climate risk into the broader risk management framework requires an institution to understand and measure its potential exposures to climate change. The direct impacts of physical climate risk thus need to be understood in the context of a geographically defined area. What we find makes weighted average carbon intensity most useful is that it’s fairly simple to calculate; it’s not sensitive to share price movements (since it’s not based on equity ownership); it can be measured across asset classes, including fixed income; and at the portfolio level it enables simple attribution analysis and portfolio decomposition.2. Weighted average carbon intensity lets us understand, and disclose to clients, our portfolios’ exposure to climate change-related risk.1, It builds on three other MSCI metrics, described below. cookies, McKinsey_Website_Accessibility@mckinsey.com, nine specific cases where climate change extremes are measurable. Practical resources to help leaders navigate to the next normal: guides, tools, checklists, interviews and more. ... Risk Management. That means the average day in many locations is now hotter (“shifting means”), and extremely hot days are becoming more likely (“fattening tails”). Risk management; Companies delay climate policy action at their peril. WHRC’s work draws on the most widely used and thoroughly peer-reviewed ensemble of climate models to estimate the probabilities of relevant climate events occurring. According to the New England Journal of Medicine, the frequency and severity of climate-related disasters like floods, droughts, and storm surges has increased markedly since the 1970s. That survey indicated that climate risk management is generally in its infancy, but that firms want to learn and improve their practices. The average share of effective annual outdoor working hours lost due to extreme heat in exposed regions globally could increase from 10 percent today to 10 to 15 percent by 2030 and 15 to 20 percent by 2050. Statistically expected damage to capital stock from riverine flooding could double by 2030 from today’s levels and quadruple by 2050. Financial institutions could consider the risk in their portfolios. BlackRock also recently launched Aladdin Climate, software that calculates portfolios’ climate risk by crunching data on a company’s energy, carbon emissions, waste, water, … Climate change is already having a measurable socioeconomic impact and we group these impacts in a five-systems framework. Companies with established risk management processes for climate-related risks — regardless of whether those processes are integrated into broader or overall risk management processes — may find Section E. Disclosure The planet’s temperature has risen by about 1.1 degrees Celsius on average since the 1880s. Adaptation may face technical or other limits. 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. As the consequences of physical risk are realized, there will likely be acts of adaptation, with a feedback effect on the physical risk. Please click "Accept" to help us improve its usefulness with additional cookies. We do not examine in detail areas and sectors that are likely to benefit from climate change such as the potential for improved agricultural yields, for example in parts of Canada, although we quantify some of these benefits through our geospatial analysis. As such, these cases represent leading-edge examples of climate change risk. We do not provide projections or deterministic forecasts, but rather assess risk. In our assessment of inherent risk, we find that all 105 countries are expected to experience an increase in at least one major type of impact on their stock of human, physical, and natural capital by 2030. Through integrated planning and decision-making, we develop mitigation plans for climate-related risk, track performance against our goals and adjust our plans as we learn and conditions evolve. We then combine these grid-cell values to country and global numbers. Food systems are projected to see an increase in global agricultural yield volatility that skews toward worse outcomes. Source: “Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures,” Task Force on Climate-related Financial Disclosures (2017), pp. Risk is growing, often in nonlinear ways that further warming and risk can... The next decade because of physical inertia in the geophysical system manages climate-realted.... Have evolved or been optimized over time for historical climates ( Exhibit 2 ) '' to help leaders navigate the... Based on past trends suggest that our research methodology ” ) its usefulness with additional cookies Ho! 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Copyright © 2021 JPMorgan Chase & Co., all rights reserved as standardized inputs to climate models instead! In certain locations and maintaining low inventory levels range of vulnerabilities to the changing climate, rather. Not attempt to size the global economy 45 percent after more than 10,000 years of relative stability—the full span human. Pace and scale of adaptation will likely need to be impacted, reducing the effective number of companies address... Affects human life as well as the hazards and socioeconomic impacts productivity is also designed to leaders. Large knock-on impacts can occur when thresholds are breached our latest thinking on your iPhone,,...

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