© National Geographic. Integrating climate risk into the broader risk management framework requires an institution to understand and measure its potential exposures to climate change. After more than 10,000 years of relative stability—the full span of human civilization—the Earth’s climate is changing. 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. The course is designed to help professionals understand and manage the potential economic and operational impacts of sustainability and climate risks (SCRs) in their organizations. MSCI metrics may not fully reflect future economic reality. 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. This rate of warming is at least an order of magnitude faster than any found in the past 65 million years of paleoclimate records. Global geospatial analysis. 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. Today, about 25 percent of the Earth’s land area has already experienced a shift in climate classification compared with the 1901–25 period. We also provide decision makers with a new framework and methodology to estimate risks in their own specific context. Climate risk creates spatial inequality, as it may simultaneously benefit some regions while hurting others. Please try again later. Four “Representative Concentration Pathways” (RCPs) act as standardized inputs to climate models. McKinsey Insights - Get our latest thinking on your iPhone, iPad, or Android device. Use minimal essential At the same time, opportunities from a changing climate will emerge and require consideration. Will the world's breadbaskets become less reliable? Here, we highlight key methodological choices: Choice of climate scenario. For each of our cases, we identify possible adaptation responses. 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. We have not conducted a detailed bottom-up cost-benefit analysis of adaptation but have built on existing literature and expert interviews to understand the most important measures and their indicative cost, effectiveness, and implementation challenges, and to estimate the expected global adaptation spending required. 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. ASIC investigating large companies' climate change risk management. LGIM increases pressure on companies to address climate risk, holding a far more extensive number of companies to account. Societies have been adapting to the changing climate, but the pace and scale of adaptation will likely need to increase significantly. Our set of 105 countries represents 90 percent of the world’s population and 90 percent of global GDP. Climate Change in USAID Strategies: A Mandatory Reference for ADS Chapter 201 – This document provides guidance on climate risk management and the integration of climate change adaptation and mitigation in USAID strategies. The direct impacts of physical climate risk thus need to be understood in the context of a geographically defined area. fund reporting. Disclose how the organisation identifies, assesses, and manages climate-realted risks. Jonathan Woetzel is a director of the McKinsey Global Institute, where Mekala Krishnan is a senior fellow. 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. Averages also conceal wide spatial disparities. Brodie Boland is an associate partner in the Washington office. For cities, a climate focus will become essential for urban planning decisions. Could climate become the weak link in your supply chain? We do not assess the efficacy of climate models but instead draw on best practice approaches from climate science literature and highlight key uncertainties. Of the four, we’ve chosen the one we think is best to monitor and manage climate risks and opportunities in investment portfolios. Never miss an insight. In Ho Chi Minh City, Climate change could create inequality—simultaneously benefiting some regions while hurting others. Why J.P. Morgan Asset Management uses weighted average carbon intensity in its Mass Mutual Life Insurance has assets under management of $139 billion unprotected to climate risks. 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 Please click "Accept" to help us improve its usefulness with additional cookies. The intensification of climate hazards across regions will bring areas hitherto unexposed to impacts into new risk territory. Companies active in the oil, ... Risks of Climate Change and Impact on Regulated Non-Depositories. Climate change is already having a measurable socioeconomic impact and we group these impacts in a five-systems framework. (For more details click on “Our research methodology”). In the future, hazard intensification will likely assume a greater role. Reduced dividends on natural capital? Will mortgages and markets stay afloat in Florida? 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. The general approach to climate change risk management is the same for all kinds of organisations, although there may be differences in detail. These assessments, often strategic in nature, now need to expand to include quantitative risk analyses, integrated into existing risk management frameworks. The New York Attorney General was able to prove this by subpoenaing evidence that demonstrated that the company’s consultants had warned that increased climate regulation would have “severe impacts on the company — and, indeed, reduce its sales i… Our climate-related risk management process is designed to drive appropriate action for adapting to a range of possible future scenarios. Climate Risk Management at USAID Video – This video provides a high-level overview of of USAID’s Climate Risk Management process. Please use UP and DOWN arrow keys to review autocomplete results. 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. Unleash their potential. Select topics and stay current with our latest insights, Climate risk and response: Physical hazards and socioeconomic impacts. Most of the climatological analysis performed for this report was done by Woods Hole Research Center (WHRC), and in other instances, we relied on publicly available climate science data, for example from institutions like the World Resources Institute. RCP 8.5, because of the higher-emissions, lower-mitigation scenario it portrays, in order to assess physical risk in the absence of further decarbonization. The GARP Risk Institute (GRI) recently undertook a global, cross-sectoral survey of firms’ approaches to managing the financial risks associated with climate change. Where we think climate risk may be material, we review fossil fuel exposure, disclosed reduction targets going forward and other relevant information. In statistical terms, distributions of temperature are shifting to the right (towards warmer temperatures) and broadening. 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). Flip the odds. Case studies. 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. Our flagship business publication has been defining and informing the senior-management agenda since 1964. 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. 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. Global physical risk climate change scenarios measuring potential economic losses of climate related events / risks Stand-alone ESG, Sustainable Finance and Climate Risk Solutions Highlights Moody’s and its affiliates combine the best of risk management and ESG expertise: Through this “micro” approach, we offer decision makers a methodology by which to assess direct physical climate risk, its characteristics, and its potential knock-on impacts. Risk recognition could trigger capital reallocation and asset repricing and indicates the presence of systemic risk. Urban areas in India and Pakistan may be the first places in the world to experience such lethal heatwaves (Exhibit 6). hereLearn more about cookies, Opens in new The economics of adaptation could worsen in some geographies over time, for example, those exposed to rising sea levels. Identifying and Managing the Financial Risks of Climate Change Enhance your knowledge of how climate change translates to financial risk through sessions exploring emerging regulatory expectations, TCFD recommendations, data management and scenario analysis. We find that physical risk from a changing climate is already present and growing. Why J.P. Morgan Asset Management uses weighted average carbon intensity in its fund reporting. BlackRock also recently launched Aladdin Climate, software that calculates portfolios’ climate risk by crunching data on a company’s energy, carbon emissions, waste, water, … Overall, our cases highlight a wide range of vulnerabilities to the changing climate. For this reason, we do not attempt to size the global GDP at risk from climate change. 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). We primarily rely on past examples and empirical estimates for this assessment of knock-on effects, which is likely not exhaustive given the complexities associated with socioeconomic systems. Economic and financial systems have been designed and optimized for a certain level of risk and increasing hazards may mean that such systems are vulnerable when they reach systemic thresholds. This is because such systems have evolved or been optimized over time for historical climates (Exhibit 2). That means the average day in many locations is now hotter (“shifting means”), and extremely hot days are becoming more likely (“fattening tails”). 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. Something went wrong. Climate science tells us that further warming and risk increase can only be stopped by achieving zero net greenhouse gas emissions. This geospatial analysis relies on the same five-systems framework of direct impacts that we used for the case studies. One of the biggest challenges could stem from using the wrong models to quantify risk. Specifically, we looked 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 in supply chains for semiconductors and heavy rare earth metals; disruption of five types of infrastructure services and, in particular, the threat of flooding to urban areas; and destruction of natural capital through impacts on glaciers, oceans, and forests. Climate risk management covers a broad range of potential actions, including: early-response systems, strategic diversification, dynamic resource-allocation rules, financial instruments (such as climate risk insurance), infrastructure design and capacity building. While many scientists, including climate scientists, are employed at McKinsey & Company, we are not a climate modeling institution. 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. collaboration with select social media and trusted analytics partners Climate scenario analysis serves as a “what-if” analysis and is a useful tool to quantify the potential exposures of an institution to transition and physical risks. Will infrastructure bend or break under climate stress? 2Note that for certain portfolios focused on sustainability, the metric normalized carbon emission data per dollar invested may be a better indicator of impact. Further warming is “locked in” for the next decade because of physical inertia in the geophysical system. The planet’s temperature has risen by about 1.1 degrees Celsius on average since the 1880s. 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. Our focus in this report has been on translating the climate science data into an assessment of physical risk and its implications for stakeholders. 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. Dickon Pinner is a senior partner in McKinsey’s San Francisco office. By political reporter Jack Snape and senior business correspondent Peter Ryan. If you would like information about this content we will be happy to work with you. 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. risk management frameworks. Impacts of physical climate risk is growing, often strategic in nature sometimes occurring at the extremes given thermal! This is because such systems have evolved or been optimized over time and is doesn! 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Msci metrics may not fully reflect future economic reality disclosed reduction targets going forward other. Financial institutions could consider the risk in their portfolios in certain locations and maintaining low inventory....
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