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datetime="2020-01-16T00:00:00Z">January 16, 2020</time> | Report</div></div></div><div><button data-component="mdc-c-button" aria-label="" type="button" id="button_id" class="mdc-c-button___U4iY2_2734c4f mdc-c-button--ghost mdc-c-button--size-medium FullHero_mck-c-full-hero__arrow__jtXdj" data-click-track="true" data-layer-event-prefix="UI Item" data-layer-action="click" data-layer-category="article" data-layer-text="skip article header section" data-layer-region="full hero"><span data-component="mdc-c-icon" class="mdc-c-icon___oi7ef_2734c4f mdc-c-icon--size-xl___3BEee_2734c4f mck-arrow-down-icon"></span></button></div></div></div></div></div></div></div></div><div class="mck-o-container"><div class="mck-o-container--wrapped mck-o-container--mobile-spacing mdc-u-grid mdc-u-grid-gutter-xxl"><section data-layer-region="article-body-header" class="mdc-u-grid mdc-u-grid-col-md-12 mck-u-animation-blur-in-400 byline-share-container"><div class="mdc-u-grid-col-md-start-2 mdc-u-grid-col-md-end-8 mdc-u-grid-col-lg-start-3 mdc-u-grid-col-lg-end-8 mdc-u-ts-9"><span> </span><span class="AuthorsByLine_mck-c-authors-byline__author__XdrlD"><span class="AuthorsByLine_mck-c-authors-byline__no-wrap__Ced0j">Lola Woetzel </span></span><span class="AuthorsByLine_mck-c-authors-byline__author__XdrlD"><span class="AuthorsByLine_mck-c-authors-byline__no-wrap__Ced0j">Dickon Pinner </span></span><span class="AuthorsByLine_mck-c-authors-byline__author__XdrlD"><span class="AuthorsByLine_mck-c-authors-byline__no-wrap__Ced0j">Hamid Samandari </span></span><span class="AuthorsByLine_mck-c-authors-byline__author__XdrlD"><span class="AuthorsByLine_mck-c-authors-byline__no-wrap__Ced0j"><a data-component="mdc-c-link" href="/our-people/hauke-engel" class="mdc-c-link-inline___7DRrt_2734c4f mdc-c-link-inline--secondary___YKoOK_2734c4f"><span class="mdc-c-link__label___Pfqtd_2734c4f">Hauke Engel</span></a> </span></span><span class="AuthorsByLine_mck-c-authors-byline__author__XdrlD"><span class="AuthorsByLine_mck-c-authors-byline__no-wrap__Ced0j"><a data-component="mdc-c-link" href="/our-people/mekala-krishnan" class="mdc-c-link-inline___7DRrt_2734c4f mdc-c-link-inline--secondary___YKoOK_2734c4f"><span class="mdc-c-link__label___Pfqtd_2734c4f">Mekala Krishnan</span></a> </span></span><span class="AuthorsByLine_mck-c-authors-byline__author__XdrlD"><span class="AuthorsByLine_mck-c-authors-byline__no-wrap__Ced0j"><a data-component="mdc-c-link" href="/our-people/brodie-boland" class="mdc-c-link-inline___7DRrt_2734c4f mdc-c-link-inline--secondary___YKoOK_2734c4f"><span class="mdc-c-link__label___Pfqtd_2734c4f">Brodie Boland</span></a><span> </span></span></span><span class="AuthorsByLine_mck-c-authors-byline__author__XdrlD"><span class="AuthorsByLine_mck-c-authors-byline__no-wrap__Ced0j">Carter Powis</span></span></div><div class="mdc-u-grid-col-md-start-8 mdc-u-grid-col-md-end-12 mdc-u-grid-col-lg-start-8 mdc-u-grid-col-lg-end-11 ArticleContent_mck-c-article-content__share-tools__kWRRw"></div></section><section class="mdc-u-grid mdc-u-grid-col-md-12 mck-u-animation-blur-in-400"><div class="mdc-u-grid-col-md-start-2 mdc-u-grid-col-md-end-12 mdc-u-grid-col-lg-start-3 mdc-u-grid-col-lg-end-11"><div data-component="mdc-c-description" class="mdc-c-description___SrnQP_2734c4f mdc-u-ts-5"><div class="mck-u-links-inline">How could Earth’s changing climate impact socioeconomic systems across the world in the next three decades? A yearlong, cross-disciplinary research effort at McKinsey & Company provides some answers.</div></div></div></section><main data-layer-region="article-body" class="mdc-u-grid mdc-u-grid-gutter-xxl"><div class="mdc-u-grid mdc-u-grid-col-1 mdc-u-grid-col-md-12"><div class="mdc-u-grid-col-md-start-2 mdc-u-grid-col-md-end-12 mdc-u-grid-col-lg-start-3 mdc-u-grid-col-lg-end-11"><div class="mdc-o-content-body mck-u-dropcap"><div data-component="mdc-c-module-wrapper" data-module-theme="default" data-module-background="transparent" data-module-category="" class="DownloadsSidebar_mck-c-downloads-sidebar__iFmyt mck-o-xs-right-span"><div data-layer-region="downloads-right-rail"><h3 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f mdc-c-heading--title___5qyOB_2734c4f mdc-c-heading--border___K8dj3_2734c4f"></h3><div><div data-component="mdc-c-link-container" class="mdc-c-link-container___xefGu_2734c4f"><a data-component="mdc-c-link" href="/~/media/mckinsey/business functions/sustainability/our insights/climate risk and response physical hazards and socioeconomic impacts/mgi-climate-risk-and-response-executive-summary-vf.pdf" class="DownloadsSidebar_mck-c-downloads-sidebar__download-link__fPqFQ mdc-c-link___lBbY1_2734c4f" target="_blank" data-layer-event-prefix="Download Link" data-layer-action="click" data-layer-report-type="" data-layer-file-name="mgi-climate-risk-and-response-executive-summary-vf" data-layer-report-name="mgi-climate-risk-and-response-executive-summary-vf>"><span data-component="mdc-c-icon" class="mdc-c-icon___oi7ef_2734c4f mdc-c-icon--size-md___yi5fA_2734c4f mck-download-icon"></span><span class="mdc-c-link__label___Pfqtd_2734c4f"> (PDF-1 MB)</span></a><a data-component="mdc-c-link" href="/~/media/mckinsey/business functions/sustainability/our insights/climate risk and response physical hazards and socioeconomic impacts/mgi-climate-risk-and-response-full-report-vf.pdf" class="DownloadsSidebar_mck-c-downloads-sidebar__download-link__fPqFQ mdc-c-link___lBbY1_2734c4f" target="_blank" data-layer-event-prefix="Download Link" data-layer-action="click" data-layer-report-type="" data-layer-file-name="mgi-climate-risk-and-response-full-report-vf" data-layer-report-name="mgi-climate-risk-and-response-full-report-vf>"><span data-component="mdc-c-icon" class="mdc-c-icon___oi7ef_2734c4f mdc-c-icon--size-md___yi5fA_2734c4f mck-download-icon"></span><span class="mdc-c-link__label___Pfqtd_2734c4f"> (PDF-4 MB)</span></a></div></div></div></div> <p><strong>After more than 10,000 years</strong> 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 (Exhibit 1). In this report, 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.</p> <div data-component="mdc-c-module-wrapper" data-module-theme="default" data-module-background="transparent" data-module-category="" class="mck-c-inline-module-container mck-o-md-center"><div class="mdc-u-grid mdc-u-grid-gutter-lg mdc-u-grid-col-sm-1 mdc-u-grid--align-start mdc-u-mb-3 GenericItem_mck-c-generic-item__sGwKL"><div data-component="mdc-c-content-block" class="mdc-c-content-block___7p6Lu_2734c4f mdc-u-grid-gutter-xs GenericItem_mck-c-generic-item__content__gq1m0"><div class="mck-c-eyebrow mdc-u-ts-10"><span> 1</span></div></div></div><div class="mck-u-inline-module-border-top mck-u-inline-module-border-bottom"><picture data-component="mdc-c-picture" class="Exhibit_mck-c-exhibit__image__pyIDm"><source media="(min-width: 768px)" srcSet="/~/media/mckinsey/business%20functions/sustainability/our%20insights/climate%20risk%20and%20response%20physical%20hazards%20and%20socioeconomic%20impacts/svgz-mgi-climatechange-ex1.svgz?cq=50&cpy=Center"/><img alt="Global average temperatures are expected to increase between 1.5 and 5 degrees Celsius relative to today in many locations by 2050." src="/~/media/mckinsey/business%20functions/sustainability/our%20insights/climate%20risk%20and%20response%20physical%20hazards%20and%20socioeconomic%20impacts/svgz-mgi-climatechange-ex1.svgz?cq=50&cpy=Center" loading="lazy"/></picture></div><div class="mck-u-sr-only"></div></div> <div data-component="mdc-c-module-wrapper" data-module-theme="light" data-module-background="lightest-grey" data-module-category="" data-module-gradient-position="bottom-right" class="mck-c-inline-module-container SideBar_mck-c-sidebar__bgimg-wrapper__Qj4Dt mck-o-sm-left-span SideBar_mck-c-sidebar__sidebar-wrapper__Dpjw2 SideBar_mck-c-sidebar__sidebar-wrapper--istablet__IQ6ii mck-u-screen-only mck-c-module-wrapper" data-layer-region="sidebar"><div class="SideBar_mck-c-sidebar__epoAm mck-o-md-center"><div class="SideBar_mck-c-sidebar__share-icons-wrapper__9gB_c"><div data-component="mdc-c-link-container" class="mdc-c-link-container___xefGu_2734c4f mdc-c-link-container--display-column___X0HDD_2734c4f SideBar_mck-c-sidebar__share-icons___eQy6"><div data-component="mdc-c-dropdown-menu" class="mdc-c-drop-down"><button data-component="mdc-c-button" aria-label="" type="button" id="button_id" class="mdc-c-button___U4iY2_2734c4f mdc-c-button--ghost mdc-c-button--size-medium mdc-c-drop-down__rootmenu___yJzvz_2734c4f" aria-expanded="false" aria-haspopup="menu"><span data-component="mdc-c-icon" class="mdc-c-icon___oi7ef_2734c4f mdc-c-icon--default___f-hQM_2734c4f mdc-c-icon--size-md___yi5fA_2734c4f mck-share2-icon"></span></button><div data-component="mdc-c-module-wrapper" data-module-theme="light" data-module-background="white" data-module-category="" class=""></div></div><button data-component="mdc-c-button" aria-label="Expandable Sidebar" type="button" id="button_id" class="mdc-c-button___U4iY2_2734c4f mdc-c-button--ghost mdc-c-button--size-medium SideBar_mck-c-sidebar__toggle-btn__EL8iE" aria-expanded="false" data-layer-event-prefix="UI Item" data-layer-action="click" data-layer-category="sidebar" data-layer-subcategory="open" data-layer-text="open sidebar"><span data-component="mdc-c-icon" class="mdc-c-icon___oi7ef_2734c4f mdc-c-icon--radial___y3csX_2734c4f mdc-c-icon--size-xxl___cL3ZT_2734c4f mck-plus-no-circle-icon"></span></button></div></div><div class="SideBar_mck-c-sidebar__content-outer__UdWCq"><div class="SideBar_mck-c-sidebar__eyebrow__5GSEq"></div><div class="SideBar_mck-c-sidebar__content__raEwe"><h2 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f mdc-u-ts-3 SideBar_mck-c-sidebar__content-heading__NJekY"><div>Our research methodology</div></h2><div class="SideBar_mck-c-sidebar__content-description__4p9iI mdc-u-ts-7"><div class="mdc-o-content-body"><p>In this report, we measure the impact of climate change by the extent to which it could affect human beings, human-made physical assets, and the natural world. While many scientists, including climate scientists, are employed at McKinsey & Company, we are not a climate modeling institution. Our focus in this report has been on translating the climate science data into an assessment of physical risk and its implications for stakeholders. 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. 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. Here, we highlight key methodological choices:</p> <p><strong><em>Choice of climate scenario.</em></strong> 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. 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 (RCP 2.6) to higher (RCP 8.5) CO<sub>2</sub> 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 the absence of further decarbonization.</p> <p><strong><em>Case studies.</em></strong> In order to link physical climate risk to socioeconomic impact, we investigate <a href="/featured-insights/climate-change">nine specific cases where climate change extremes are measurable</a>. These cover a range of sectors and geographies and provide the basis of a “micro-to-macro” approach that is a characteristic of MGI research. To inform our selection of cases, we considered over 30 potential combinations of climate hazards, sectors, and geographies based on a review of the literature and expert interviews on the potential direct impacts of physical climate hazards. We find these hazards affect five different key socioeconomic systems: livability and workability, food systems, physical assets, infrastructure services, and natural capital. </p> <p>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. As such, these cases represent leading-edge examples of climate change risk. They show that the direct risk from climate hazards is determined by the severity of the hazard and its likelihood, the exposure of various “stocks” of capital (people, physical capital, and natural capital) to these hazards, and the resilience of these stocks to the hazards (for example, the ability of physical assets to withstand flooding). Through our case studies, we also assess the knock-on effects that could occur, for example to downstream sectors or consumers. 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. 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.</p> <p><strong><em>Global geospatial analysis.</em></strong> In a separate analysis, we use geospatial data to provide a perspective on climate change across 105 countries over the next 30 years. This geospatial analysis relies on the same five-systems framework of direct impacts that we used for the case studies. For each of these systems, we identify a measure, or measures, of the impact of climate change, using indicators where possible as identified in our cases. </p> <p>Similar to the approach discussed above for our cases, our analyses are conducted at a grid-cell level, overlaying data on a hazard (for example, floods of different depths, with their associated likelihoods), with exposure to that hazard (for example, capital stock exposed to flooding), and a damage function that assesses resilience (for example, what share of capital stock is damaged when exposed to floods of different depths). We then combine these grid-cell values to country and global numbers. While the goal of this analysis is to measure direct impact, due to data availability issues, we have used five measures of socioeconomic impact and one measure of climate hazards themselves—drought. Our set of 105 countries represents 90 percent of the world’s population and 90 percent of global GDP. 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). </p> <h4>What this report does not do</h4> <p>Since the purpose of this report is to understand the physical risks and disruptive impacts of climate change, there are many areas which we do not address in this report:</p> <ul> <li>We do not assess the efficacy of climate models but instead draw on best practice approaches from climate science literature and highlight key uncertainties.</li> <li>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. </li> <li>As the consequences of physical risk are realized, there will likely be acts of adaptation, with a feedback effect on the physical risk. For each of our cases, we identify possible adaptation responses. 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.</li> <li>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. </li> <li>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. There are likely knock-on effects that could occur which our analysis has not taken into account. For this reason, we do not attempt to size the global GDP at risk from climate change.</li> <li>We do not provide projections or deterministic forecasts, but rather assess risk. The climate is the statistical summary of weather patterns over time and is therefore probabilistic in nature. 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. </li> </ul></div></div></div></div></div></div> <p>We estimate inherent physical risk, absent adaptation and mitigation, to assess the magnitude of the challenge and highlight the case for action. Climate science makes extensive use of scenarios ranging from lower (Representative Concentration Pathway 2.6) to higher (RCP 8.5) CO<sub>2</sub> concentrations. We have chosen to focus on RCP 8.5, because the higher-emission scenario it portrays enables us to assess physical risk in the absence of further decarbonization. (For more details click on “Our research methodology”). In this report, we link <a href="/capabilities/risk-and-resilience/our-insights/using-model-risk-management-to-address-climate-analytics-its-a-process-not-a-task">climate models</a> with economic projections to examine nine cases that illustrate exposure to climate change extremes and proximity to physical thresholds. A separate geospatial assessment examines six indicators to assess potential socioeconomic impact in 105 countries. We also provide decision makers with a new framework and methodology to estimate risks in their own specific context.</p> <div data-component="mdc-c-module-wrapper" data-module-theme="default" data-module-background="transparent" data-module-category="" class="mck-c-disruptor1up mck-o-md-center mck-u-inline-module-border-top mck-u-inline-module-border-bottom mck-u-screen-only" data-layer-region="disruptor-1up"><div class="mdc-u-grid mdc-u-grid-gutter-md mdc-u-grid-col-lg-12 mdc-u-grid-col-md-12 "><div class="mdc-u-grid-col-lg-span-4 mdc-u-grid-col-md-span-5 Disruptor1Up_mck-c-disruptor1up__image___2Gc4"><picture data-component="mdc-c-picture"><img alt="Move from plans to progress." src="/~/media/mckinsey/business%20functions/sustainability/how%20we%20help%20clients/sustainability-campaign_promo-thumb_1536x1536.jpg?cq=50&mh=145&car=16:9&cpy=Center" loading="lazy"/></picture></div><div class="mdc-u-grid-col-lg-span-8 mdc-u-grid-col-md-span-7"><header data-component="mdc-c-header" class="mdc-c-header"><div class="mdc-c-header__block___i1Lg-_2734c4f"><h3 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f"><div><span class="disrupt-ab">Move from plans to progress.</span></div></h3><div data-component="mdc-c-description" class="mdc-c-description___SrnQP_2734c4f mdc-u-ts-7"><p><div>Sustainability matters. Together we’ll make it real.</div></p></div></div></header><div data-component="mdc-c-link-container" class="mdc-c-link-container___xefGu_2734c4f mdc-c-link-container--display-column___X0HDD_2734c4f mck-c-disruptor1up__content Disruptor1Up_mck-c-disruptor1up__content--links__VV4lE mdc-u-grid-gutter-md"><a data-component="mdc-c-link" href="https://www.mckinsey.com/capabilities/sustainability/how-we-help-clients/?cid=susti24-ste-crk-mbm-m01-other-glb-web" class="mdc-c-link-cta___NBQVi_2734c4f" target="_blank"><span class="mdc-c-link__label___Pfqtd_2734c4f">Get started</span><span data-component="mdc-c-icon" class="mdc-c-icon___oi7ef_2734c4f mck-external-icon"></span></a></div></div></div></div> <div data-component="mdc-c-module-wrapper" data-module-theme="light" data-module-background="lightest-grey" data-module-category="" class="mck-o-edge-to-edge TableOfContents_mck-c-table-of-contents__zeYey"><div class="mck-o-container"><div class="mck-o-container--wrapped mck-o-container--mobile-spacing"><div class="mdc-u-grid mdc-u-grid-col-md-12"><div class="mdc-u-grid-col-md-start-2 mdc-u-grid-col-md-end-12 mdc-u-grid-col-lg-start-3 mdc-u-grid-col-lg-end-11"><h6 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f mdc-u-ts-10 TableOfContents_mck-c-table-of-contents__heading__nQD1F">TABLE OF CONTENTS</h6><ol class="mdc-u-ts-7 TableOfContents_mck-c-table-of-contents__list__ivUca"><li class="TableOfContents_mck-c-table-of-contents__list-item__Q8xfB"><a data-component="mdc-c-link" href="#section-header-1" class="mdc-c-link-heading___Zggl8_2734c4f"><span class="mdc-c-link__label___Pfqtd_2734c4f">Seven characteristics of physical climate risk stand out</span></a></li><li class="TableOfContents_mck-c-table-of-contents__list-item__Q8xfB"><a data-component="mdc-c-link" href="#section-header-2" class="mdc-c-link-heading___Zggl8_2734c4f"><span class="mdc-c-link__label___Pfqtd_2734c4f">Climate change is already having substantial physical impacts in regions across the world</span></a></li><li class="TableOfContents_mck-c-table-of-contents__list-item__Q8xfB"><a data-component="mdc-c-link" href="#section-header-3" class="mdc-c-link-heading___Zggl8_2734c4f"><span class="mdc-c-link__label___Pfqtd_2734c4f">Socioeconomic impacts will likely be nonlinear and have knock-on effects</span></a></li><li class="TableOfContents_mck-c-table-of-contents__list-item__Q8xfB"><a data-component="mdc-c-link" href="#section-header-4" class="mdc-c-link-heading___Zggl8_2734c4f"><span class="mdc-c-link__label___Pfqtd_2734c4f">Global socioeconomic impacts could be substantial</span></a></li><li class="TableOfContents_mck-c-table-of-contents__list-item__Q8xfB"><a data-component="mdc-c-link" href="#section-header-5" class="mdc-c-link-heading___Zggl8_2734c4f"><span class="mdc-c-link__label___Pfqtd_2734c4f">Countries with lower GDP per capita levels are generally more exposed</span></a></li><li class="TableOfContents_mck-c-table-of-contents__list-item__Q8xfB"><a data-component="mdc-c-link" href="#section-header-6" class="mdc-c-link-heading___Zggl8_2734c4f"><span class="mdc-c-link__label___Pfqtd_2734c4f">What can decision makers do?</span></a></li></ol></div></div></div></div></div> <div data-component="mdc-c-module-wrapper" data-module-theme="dark" data-module-background="deep-blue" data-module-category="" data-module-gradient-position="top-right" class="mck-o-edge-to-edge SectionHeader_mck-c-section-header___N7qG mck-c-module-wrapper"><style></style><div data-component="mdc-c-background-image" class="mdc-c-bg-image___GJdv1_2734c4f background-image-section-header-ADD2CB1F18754881A2CF2299ADA30119-bg SectionHeader_mck-c-section-header__parallax-container__sgMMy" role="img" aria-label="Seven characteristics of physical climate risk stand out"></div><div class="mdc-c-bg-image___GJdv1_2734c4f mdc-c-bg-image--opaque-bg___CauU1_2734c4f" style="opacity:0.3"></div><div class="mck-o-container"><div class="mck-o-container--wrapped mck-o-container--mobile-spacing"><div id="section-header-1" class="mdc-u-grid mdc-u-grid-col-lg-12 SectionHeader_mck-c-section-header__wrapper__CZEyB"><div class="mdc-u-grid-col-lg-start-2 mdc-u-grid-col-lg-end-12 SectionHeader_mck-c-section-header__wrapper-positioned__fIWpF"><div class="mdc-u-grid mdc-u-grid-gutter-sm SectionHeader_mck-c-section-header__wrapper-text__hSx1f"><div data-component="mdc-c-description" class="mdc-c-description___SrnQP_2734c4f mdc-u-ts-10"><span>Part 1</span></div><h2 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f SectionHeader_mck-c-section-header__heading__2ePOu"><span>Seven characteristics of physical climate risk stand out</span></h2></div><div class="SectionHeader_mck-c-section-header__section-holder__BaLti"></div></div></div></div></div></div> <p>We find that physical risk from a changing climate is already present and growing. Seven characteristics stand out. Physical climate risk is:</p> <p><strong><em>Increasing:</em></strong> In each of our nine cases, the level of physical climate risk increases by 2030 and further by 2050. Across our cases, we find increases in socioeconomic impact of between roughly two and 20 times by 2050 versus today’s levels. We also find physical climate risks are increasing across our global country analysis even as some countries find some benefits (such as expected increase in agricultural yields <span>in countries such as Canada</span>).</p> <p><strong><em>Spatial:</em></strong> Climate hazards manifest locally. The direct impacts of physical climate risk thus need to be understood in the context of a geographically defined area. There are variations between countries and within countries.</p> <div data-module-category="" class="PullQuote_mck-c-pullquote__DbaQ5 mck-o-sm-right-span"><blockquote data-component="mdc-c-blockquote" class="PullQuote_mck-c-blockquote__6n21p PullQuote_mck-c-blockquote--hide-quotes__CpGpg mdc-c-blockquote mdc-c-blockquote--is-quotes___TozKo_2734c4f"><p>Warming is “locked in” for the next decade because of physical inertia in the geophysical system.</p></blockquote></div> <p><strong><em>Non-stationary:</em></strong> As the Earth continues to warm, physical climate risk is ever-changing or non-stationary. Further warming is “locked in” for the next decade because of physical inertia in the geophysical system. <a href="https://iopscience.iop.org/article/10.1088/1748-9326/aa98c9">Climate science tells us that further warming and risk increase can only be stopped by achieving zero net greenhouse gas emissions.</a> Furthermore, given the thermal inertia of the earth system, some amount of warming will also likely occur after net-zero emissions are reached.</p> <p><strong><em>Nonlinear:</em></strong> Socioeconomic impacts are likely to propagate in a nonlinear way as hazards reach thresholds beyond which the affected physiological, human-made, or ecological systems work less well or break down and stop working altogether. This is because such systems have evolved or been optimized over time for historical climates (Exhibit 2).</p> <div data-component="mdc-c-module-wrapper" data-module-theme="default" data-module-background="transparent" data-module-category="" class="mck-c-inline-module-container mck-o-md-center"><div class="mdc-u-grid mdc-u-grid-gutter-lg mdc-u-grid-col-sm-1 mdc-u-grid--align-start mdc-u-mb-3 GenericItem_mck-c-generic-item__sGwKL"><div data-component="mdc-c-content-block" class="mdc-c-content-block___7p6Lu_2734c4f mdc-u-grid-gutter-xs GenericItem_mck-c-generic-item__content__gq1m0"><div class="mck-c-eyebrow mdc-u-ts-10"><span> 2</span></div></div></div><div class="mck-u-inline-module-border-top mck-u-inline-module-border-bottom"><picture data-component="mdc-c-picture" class="Exhibit_mck-c-exhibit__image__pyIDm"><source media="(min-width: 768px)" srcSet="/~/media/mckinsey/business%20functions/sustainability/our%20insights/climate%20risk%20and%20response%20physical%20hazards%20and%20socioeconomic%20impacts/svgz-mgi-climatechange-ex2-final.svgz?cq=50&cpy=Center"/><img alt="Direct effects of climate change can become nonlinear when thresholds are crossed." src="/~/media/mckinsey/business%20functions/sustainability/our%20insights/climate%20risk%20and%20response%20physical%20hazards%20and%20socioeconomic%20impacts/svgz-mgi-climatechange-ex2-final.svgz?cq=50&cpy=Center" loading="lazy"/></picture></div><div class="mck-u-sr-only"></div></div> <p><strong><em>Systemic:</em></strong> While the direct impact from climate change is local, it can have knock-on effects across regions and sectors, through interconnected socioeconomic and financial systems.</p> <p><strong><em>Regressive:</em></strong> The poorest communities and populations within each of our cases typically are the most vulnerable. Climate risk creates spatial inequality, as it may simultaneously benefit some regions while hurting others.</p> <p><em><strong>Under-prepared:</strong></em> 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. Adaptation is likely to entail rising costs and tough choices that may include whether to invest in hardening or relocate people and assets.</p> <div data-component="mdc-c-module-wrapper" data-module-theme="dark" data-module-background="deep-blue" data-module-category="" data-module-gradient-position="top-right" class="mck-o-edge-to-edge SectionHeader_mck-c-section-header___N7qG mck-c-module-wrapper"><style></style><div data-component="mdc-c-background-image" class="mdc-c-bg-image___GJdv1_2734c4f background-image-section-header-81CE493125714112B724702F7557E1B4-bg SectionHeader_mck-c-section-header__parallax-container__sgMMy" role="img" aria-label="Climate change is already having substantial physical impacts in regions across the world"></div><div class="mdc-c-bg-image___GJdv1_2734c4f mdc-c-bg-image--opaque-bg___CauU1_2734c4f" style="opacity:0.3"></div><div class="mck-o-container"><div class="mck-o-container--wrapped mck-o-container--mobile-spacing"><div id="section-header-2" class="mdc-u-grid mdc-u-grid-col-lg-12 SectionHeader_mck-c-section-header__wrapper__CZEyB"><div class="mdc-u-grid-col-lg-start-2 mdc-u-grid-col-lg-end-12 SectionHeader_mck-c-section-header__wrapper-positioned__fIWpF"><div class="mdc-u-grid mdc-u-grid-gutter-sm SectionHeader_mck-c-section-header__wrapper-text__hSx1f"><div data-component="mdc-c-description" class="mdc-c-description___SrnQP_2734c4f mdc-u-ts-10"><span>Part 2</span></div><h2 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f SectionHeader_mck-c-section-header__heading__2ePOu"><span>Climate change is already having substantial physical impacts in regions across the world</span></h2></div><div class="SectionHeader_mck-c-section-header__section-holder__BaLti"></div></div></div></div></div></div> <p><a href="https://agupubs.onlinelibrary.wiley.com/doi/abs/10.1029/2018JD029522">The planet’s temperature</a> 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. <a href="https://science.sciencemag.org/content/341/6145/486/tab-figures-data">This rate of warming</a> is at least an order of magnitude faster than any found in the past 65 million years of paleoclimate records.</p> <p>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 (Exhibit 3). The share of the Northern Hemisphere (in square kilometers) that experiences an extremely hot summer—three-standard-deviation hotter average temperature in a given summer—has increased from zero to half a percent.</p> <div data-component="mdc-c-module-wrapper" data-module-theme="default" data-module-background="transparent" data-module-category="" class="mck-c-inline-module-container mck-o-md-center"><div class="mdc-u-grid mdc-u-grid-gutter-lg mdc-u-grid-col-sm-1 mdc-u-grid--align-start mdc-u-mb-3 GenericItem_mck-c-generic-item__sGwKL"><div data-component="mdc-c-content-block" class="mdc-c-content-block___7p6Lu_2734c4f mdc-u-grid-gutter-xs GenericItem_mck-c-generic-item__content__gq1m0"><div class="mck-c-eyebrow mdc-u-ts-10"><span> 3</span></div></div></div><div class="mck-u-inline-module-border-top mck-u-inline-module-border-bottom"><picture data-component="mdc-c-picture" class="Exhibit_mck-c-exhibit__image__pyIDm"><source media="(min-width: 768px)" srcSet="/~/media/mckinsey/business%20functions/sustainability/our%20insights/climate%20risk%20and%20response%20physical%20hazards%20and%20socioeconomic%20impacts/svgz-mgi-climatechange-ex3-vf.svgz?cq=50&cpy=Center"/><img alt="A small shift in the average can hide dramatic changes at the extremes." src="/~/media/mckinsey/business%20functions/sustainability/our%20insights/climate%20risk%20and%20response%20physical%20hazards%20and%20socioeconomic%20impacts/svgz-mgi-climatechange-ex3-vf.svgz?cq=50&cpy=Center" loading="lazy"/></picture></div><div class="mck-u-sr-only"></div></div> <p>Averages also conceal wide spatial disparities. Over the same period that the Earth globally has warmed by 1.1 degrees, in <a href="https://data.giss.nasa.gov/gistemp/">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</a>, 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.</p> <h3>The affected regions will grow in number and size</h3> <p>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 (Exhibit 4).</p> <div data-component="mdc-c-module-wrapper" data-module-theme="default" data-module-background="transparent" data-module-category="" class="mck-c-inline-module-container mck-o-md-center"><div class="mdc-u-grid mdc-u-grid-gutter-lg mdc-u-grid-col-sm-1 mdc-u-grid--align-start mdc-u-mb-3 GenericItem_mck-c-generic-item__sGwKL"><div data-component="mdc-c-content-block" class="mdc-c-content-block___7p6Lu_2734c4f mdc-u-grid-gutter-xs GenericItem_mck-c-generic-item__content__gq1m0"><div class="mck-c-eyebrow mdc-u-ts-10"><span> 4</span></div></div></div><div class="mck-u-inline-module-border-top mck-u-inline-module-border-bottom"><picture data-component="mdc-c-picture" class="Exhibit_mck-c-exhibit__image__pyIDm"><source media="(min-width: 768px)" srcSet="/~/media/mckinsey/business%20functions/sustainability/our%20insights/climate%20risk%20and%20response%20physical%20hazards%20and%20socioeconomic%20impacts/svgz-mgi-climatechange-ex4-revised.svgz?cq=50&cpy=Center"/><img alt="The likelihood of extreme precipitation could grow fourfold in parts of Central Africa, China, and the east coast of North America compared with 1950–81." src="/~/media/mckinsey/business%20functions/sustainability/our%20insights/climate%20risk%20and%20response%20physical%20hazards%20and%20socioeconomic%20impacts/svgz-mgi-climatechange-ex4-revised.svgz?cq=50&cpy=Center" loading="lazy"/></picture></div><div class="mck-u-sr-only"></div></div> <div data-component="mdc-c-module-wrapper" data-module-theme="dark" data-module-background="deep-blue" data-module-category="" data-module-gradient-position="top-right" class="mck-o-edge-to-edge SectionHeader_mck-c-section-header___N7qG mck-c-module-wrapper"><style></style><div data-component="mdc-c-background-image" class="mdc-c-bg-image___GJdv1_2734c4f background-image-section-header-79DEEE5457A54FD6928D59C0C120F845-bg SectionHeader_mck-c-section-header__parallax-container__sgMMy" role="img" aria-label="Socioeconomic impacts will likely be nonlinear and have knock-on effects"></div><div class="mdc-c-bg-image___GJdv1_2734c4f mdc-c-bg-image--opaque-bg___CauU1_2734c4f" style="opacity:0.5"></div><div class="mck-o-container"><div class="mck-o-container--wrapped mck-o-container--mobile-spacing"><div id="section-header-3" class="mdc-u-grid mdc-u-grid-col-lg-12 SectionHeader_mck-c-section-header__wrapper__CZEyB"><div class="mdc-u-grid-col-lg-start-2 mdc-u-grid-col-lg-end-12 SectionHeader_mck-c-section-header__wrapper-positioned__fIWpF"><div class="mdc-u-grid mdc-u-grid-gutter-sm SectionHeader_mck-c-section-header__wrapper-text__hSx1f"><div data-component="mdc-c-description" class="mdc-c-description___SrnQP_2734c4f mdc-u-ts-10"><span>Part 3</span></div><h2 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f SectionHeader_mck-c-section-header__heading__2ePOu"><span>Socioeconomic impacts will likely be nonlinear and have knock-on effects</span></h2></div><div class="SectionHeader_mck-c-section-header__section-holder__BaLti"></div></div></div></div></div></div> <p>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.</p> <p>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 and includes:</p> <div data-component="mdc-c-module-wrapper" data-module-theme="light" data-module-background="lightest-grey" data-module-category="" data-module-gradient-position="bottom-right" class="mck-c-inline-module-container SideBar_mck-c-sidebar__bgimg-wrapper__Qj4Dt mck-o-sm-left-span SideBar_mck-c-sidebar__sidebar-wrapper__Dpjw2 SideBar_mck-c-sidebar__sidebar-wrapper--istablet__IQ6ii mck-u-screen-only mck-c-module-wrapper" data-layer-region="sidebar"><div class="SideBar_mck-c-sidebar__epoAm mck-o-md-center"><div class="SideBar_mck-c-sidebar__share-icons-wrapper__9gB_c"><div data-component="mdc-c-link-container" class="mdc-c-link-container___xefGu_2734c4f mdc-c-link-container--display-column___X0HDD_2734c4f SideBar_mck-c-sidebar__share-icons___eQy6"><div data-component="mdc-c-dropdown-menu" class="mdc-c-drop-down"><button data-component="mdc-c-button" aria-label="" type="button" id="button_id" class="mdc-c-button___U4iY2_2734c4f mdc-c-button--ghost mdc-c-button--size-medium mdc-c-drop-down__rootmenu___yJzvz_2734c4f" aria-expanded="false" aria-haspopup="menu"><span data-component="mdc-c-icon" class="mdc-c-icon___oi7ef_2734c4f mdc-c-icon--default___f-hQM_2734c4f mdc-c-icon--size-md___yi5fA_2734c4f mck-share2-icon"></span></button><div data-component="mdc-c-module-wrapper" data-module-theme="light" data-module-background="white" data-module-category="" class=""></div></div><button data-component="mdc-c-button" aria-label="Expandable Sidebar" type="button" id="button_id" class="mdc-c-button___U4iY2_2734c4f mdc-c-button--ghost mdc-c-button--size-medium SideBar_mck-c-sidebar__toggle-btn__EL8iE" aria-expanded="false" data-layer-event-prefix="UI Item" data-layer-action="click" data-layer-category="sidebar" data-layer-subcategory="open" data-layer-text="open sidebar"><span data-component="mdc-c-icon" class="mdc-c-icon___oi7ef_2734c4f mdc-c-icon--radial___y3csX_2734c4f mdc-c-icon--size-xxl___cL3ZT_2734c4f mck-plus-no-circle-icon"></span></button></div></div><div class="SideBar_mck-c-sidebar__content-outer__UdWCq"><div class="SideBar_mck-c-sidebar__eyebrow__5GSEq"></div><div class="SideBar_mck-c-sidebar__content__raEwe"><h2 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f mdc-u-ts-3 SideBar_mck-c-sidebar__content-heading__NJekY"><div>Related Reading:</div></h2><div class="SideBar_mck-c-sidebar__content-description__4p9iI mdc-u-ts-7"><div class="mdc-o-content-body"><p>Additional case studies on climate risk include:<br/> <br/> <a href="/capabilities/sustainability/our-insights/reduced-dividends-on-natural-capital">Reduced dividends on natural capital?</a><br/> <a href="/capabilities/sustainability/our-insights/could-climate-become-the-weak-link-in-your-supply-chain">Could climate become the weak link in your supply chain?</a><br/> <a href="/capabilities/sustainability/our-insights/will-infrastructure-bend-or-break-under-climate-stress">Will infrastructure bend or break under climate stress?</a><br/> <a href="/capabilities/sustainability/our-insights/can-coastal-cities-turn-the-tide-on-rising-flood-risk">Can coastal cities turn the tide on climate risk?</a><br/> <a href="/capabilities/sustainability/our-insights/will-mortgages-and-markets-stay-afloat-in-florida">Will mortgages and markets stay afloat in Florida? </a><br/> <a href="/capabilities/sustainability/our-insights/will-the-worlds-breadbaskets-become-less-reliable">Will the world's breadbaskets become less reliable?</a><br/> <a href="/capabilities/sustainability/our-insights/how-will-african-farmers-adjust-to-changing-patterns-of-precipitation">How will African farmers adjust to changing patterns of precipitation?</a><br/> <a href="/capabilities/sustainability/our-insights/a-mediterranean-basin-without-a-mediterranean-climate">A Mediterranean basin without a Mediterranean climate?</a></p></div></div></div></div></div></div> <ul> <li><em>Livability and workability.</em> 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.</li> <li><em>Food systems.</em> 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.</li> <li><em>Physical assets.</em> Physical assets like buildings could be damaged or destroyed by extreme precipitation, tidal flooding, forest fires, and other hazards.</li> <li><em>Infrastructure services.</em> 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.</li> <li><em>Natural capital.</em> 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.</li> </ul> <div data-component="mdc-c-module-wrapper" data-module-theme="default" data-module-background="transparent" data-module-category="" class="mck-c-disruptor1up mck-o-md-center mck-u-inline-module-border-top mck-u-inline-module-border-bottom mck-u-screen-only" data-layer-region="disruptor-1up"><div class="mdc-u-grid mdc-u-grid-gutter-md mdc-u-grid-col-lg-12 mdc-u-grid-col-md-12 "><div class="mdc-u-grid-col-md-span-12"><header data-component="mdc-c-header" class="mdc-c-header"><div class="mdc-c-header__block___i1Lg-_2734c4f"><h3 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f"><div>Would you like to learn more about our <a href="/capabilities/sustainability/how-we-help-clients">Sustainability Practice</a>?</div></h3></div></header></div></div></div> <p>The nine distinct cases of physical climate risk in various geographies and sectors that we examine, including direct impact and knock-on effects, as well as adaptation costs and strategies, help illustrate the specific socioeconomic impact of the different physical climate hazards on the examined human, physical, or natural system (Exhibit 5). Our cases cover each of the five systems across geographies and include multiple climate hazards, sometimes occurring at the same location. Overall, our cases highlight a wide range of vulnerabilities to the changing climate.</p> <div data-component="mdc-c-module-wrapper" data-module-theme="default" data-module-background="transparent" data-module-category="" class="mck-c-inline-module-container mck-o-md-center"><div class="mdc-u-grid mdc-u-grid-gutter-lg mdc-u-grid-col-sm-1 mdc-u-grid--align-start mdc-u-mb-3 GenericItem_mck-c-generic-item__sGwKL"><div data-component="mdc-c-content-block" class="mdc-c-content-block___7p6Lu_2734c4f mdc-u-grid-gutter-xs GenericItem_mck-c-generic-item__content__gq1m0"><div class="mck-c-eyebrow mdc-u-ts-10"><span> 5</span></div></div></div><div class="mck-u-inline-module-border-top mck-u-inline-module-border-bottom"><picture data-component="mdc-c-picture" class="Exhibit_mck-c-exhibit__image__pyIDm"><source media="(min-width: 768px)" srcSet="/~/media/mckinsey/business%20functions/sustainability/our%20insights/climate%20risk%20and%20response%20physical%20hazards%20and%20socioeconomic%20impacts/svgz-mgi-climatechange-ex5-revised.svgz?cq=50&cpy=Center"/><img alt="Nine case studies of leading-edge climate-change impacts across all major geographies, sectors, and affected systems provide insight." src="/~/media/mckinsey/business%20functions/sustainability/our%20insights/climate%20risk%20and%20response%20physical%20hazards%20and%20socioeconomic%20impacts/svgz-mgi-climatechange-ex5-revised.svgz?cq=50&cpy=Center" loading="lazy"/></picture></div><div class="mck-u-sr-only"></div></div>  <p>Specifically, we looked at the impact of climate change on livability and workability in India and the <a href="/capabilities/sustainability/our-insights/a-mediterranean-basin-without-a-mediterranean-climate">Mediterranean</a>; disruption of food systems through looking at <a href="/capabilities/sustainability/our-insights/will-the-worlds-breadbaskets-become-less-reliable">global breadbaskets</a> and <a href="/capabilities/sustainability/our-insights/how-will-african-farmers-adjust-to-changing-patterns-of-precipitation">African agriculture</a>; physical asset destruction in <a href="/capabilities/sustainability/our-insights/will-mortgages-and-markets-stay-afloat-in-florida">residential real estate in Florida</a> and in <a href="/capabilities/sustainability/our-insights/could-climate-become-the-weak-link-in-your-supply-chain">supply chains for semiconductors and heavy rare earth metals</a>; disruption of five types of infrastructure services and, in particular, the threat of <a href="/capabilities/sustainability/our-insights/can-coastal-cities-turn-the-tide-on-rising-flood-risk">flooding to urban areas</a>; and destruction of <a href="/capabilities/sustainability/our-insights/reduced-dividends-on-natural-capital">natural capital</a> through impacts on glaciers, oceans, and forests.</p> <p>Our case studies indicate that physical climate risk is growing, often in nonlinear ways. 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 <a href="https://www.tandfonline.com/doi/abs/10.1080/17477891.2018.1540343">greater exposure to hazards</a> rather than from increases in the mean and tail intensity of hazards. In the future, hazard intensification will likely assume a greater role. Key findings from our cases include:</p> <div data-module-category="" class="PullQuote_mck-c-pullquote__DbaQ5 mck-o-sm-right-span"><blockquote data-component="mdc-c-blockquote" class="PullQuote_mck-c-blockquote__6n21p PullQuote_mck-c-blockquote--hide-quotes__CpGpg mdc-c-blockquote mdc-c-blockquote--is-quotes___TozKo_2734c4f"><p>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.</p></blockquote></div> <ul> <li>Societies and systems most at risk are ones already close to physical and biological thresholds. 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 technical threshold we employed is a three-day heatwave with wet-bulb temperatures of 34 degrees Celsius. At that point, the urban heat island effect could increase the wet-bulb temperature to 35 degrees Celsius. 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). Outdoor labor productivity is also expected to be impacted, reducing the effective number of hours that can be worked outdoors. 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.</li> <li>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. For example, supply chains are often designed for efficiency over resiliency, by concentrating production in certain locations and maintaining low inventory levels. Food production is also heavily concentrated; just <a href="/capabilities/sustainability/our-insights/will-the-worlds-breadbaskets-become-less-reliable">five regional “breadbasket” areas account for about 60 percent of global grain production</a>. Rising climate hazards might therefore cause such systems to fail, for example if key production hubs are affected.</li> <li>Financial markets could bring forward risk recognition in affected regions, with consequences for capital allocation and insurance cost and availability. Risk recognition could trigger capital reallocation and asset repricing and indicates the presence of systemic risk. In Florida, for example, estimates based on past trends suggest that <a href="/capabilities/sustainability/our-insights/will-mortgages-and-markets-stay-afloat-in-florida">losses from flooding could devalue exposed homes by $30 to $80 billion</a>, or 15 to 35 percent, by 2050, all else being equal. Rough estimates suggest that this in turn could impact property tax revenue in some of the most affected counties by 15 to 30 percent (though impacts across the state could be less, up to 2 to 5 percent).</li> <li>Large knock-on impacts can occur when thresholds are breached. These systemic risks come about in particular when the people and assets affected are central to local economies and those local economies are tied into other economic and financial systems. In Ho Chi Minh City, <a href="/capabilities/sustainability/our-insights/can-coastal-cities-turn-the-tide-on-rising-flood-risk">direct infrastructure asset damage from a 100-year flood</a> could rise from about $200—$300 million today to $500 million to $1 billion in 2050, while knock-on costs to the economy could rise from $100—$400 million to between $1.5 billion and $8.5 billion. In another case, ocean warming could reduce fish catches, for example, affecting the livelihoods of 650 million to 800 million people who rely on fishing revenue.</li> <li>Climate change could create inequality—simultaneously benefiting some regions while hurting others. For example, rising temperatures may boost tourism in areas of northern Europe while <a href="/capabilities/sustainability/our-insights/a-mediterranean-basin-without-a-mediterranean-climate">reducing the economic vitality of southern European resorts</a>. Within regions, the poorest communities and populations within each of our cases typically are the most vulnerable to climate events. They often lack financial means as well as support from public or private agencies. For example, climate events could trigger harvest failure in multiple breadbasket locations—that is, significantly lower-than-average yields in two or more key production regions for rice, wheat, corn, and soy. This could lead to rising food prices, particularly hurting the poorest communities, including the 750 million people living below the international poverty line.</li> </ul> <div data-component="mdc-c-module-wrapper" data-module-theme="dark" data-module-background="deep-blue" data-module-category="" data-module-gradient-position="top-right" class="mck-o-edge-to-edge SectionHeader_mck-c-section-header___N7qG mck-c-module-wrapper"><style></style><div data-component="mdc-c-background-image" class="mdc-c-bg-image___GJdv1_2734c4f background-image-section-header-529863F4CFB84CA0A699C9048D19DFAC-bg SectionHeader_mck-c-section-header__parallax-container__sgMMy" role="img" aria-label="Global socioeconomic impacts could be substantial"></div><div class="mdc-c-bg-image___GJdv1_2734c4f mdc-c-bg-image--opaque-bg___CauU1_2734c4f" style="opacity:0.2"></div><div class="mck-o-container"><div class="mck-o-container--wrapped mck-o-container--mobile-spacing"><div id="section-header-4" class="mdc-u-grid mdc-u-grid-col-lg-12 SectionHeader_mck-c-section-header__wrapper__CZEyB"><div class="mdc-u-grid-col-lg-start-2 mdc-u-grid-col-lg-end-12 SectionHeader_mck-c-section-header__wrapper-positioned__fIWpF"><div class="mdc-u-grid mdc-u-grid-gutter-sm SectionHeader_mck-c-section-header__wrapper-text__hSx1f"><div data-component="mdc-c-description" class="mdc-c-description___SrnQP_2734c4f mdc-u-ts-10"><span>Part 4</span></div><h2 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f SectionHeader_mck-c-section-header__heading__2ePOu"><span>Global socioeconomic impacts could be substantial</span></h2></div><div class="SectionHeader_mck-c-section-header__section-holder__BaLti"></div></div></div></div></div></div> <p>While our case studies illustrate the localized impacts of a changing climate, rising temperatures are a global trend and we assess how physical climate hazards could evolve in 105 countries.</p> <p>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. Intensifying climate hazards could put millions of lives at risk, as well as trillions of dollars of economic activity and physical capital, and the world’s stock of natural capital. The intensification of climate hazards across regions will bring areas hitherto unexposed to impacts into new risk territory. In particular:</p> <ul> <li>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). Urban areas in India and Pakistan may be the first places in the world to experience such lethal heatwaves (Exhibit 6). 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. 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.</li> </ul> <div data-component="mdc-c-module-wrapper" data-module-theme="default" data-module-background="transparent" data-module-category="" class="mck-c-inline-module-container mck-o-md-center"><div class="mdc-u-grid mdc-u-grid-gutter-lg mdc-u-grid-col-sm-1 mdc-u-grid--align-start mdc-u-mb-3 GenericItem_mck-c-generic-item__sGwKL"><div data-component="mdc-c-content-block" class="mdc-c-content-block___7p6Lu_2734c4f mdc-u-grid-gutter-xs GenericItem_mck-c-generic-item__content__gq1m0"><div class="mck-c-eyebrow mdc-u-ts-10"><span> 6</span></div></div></div><div class="mck-u-inline-module-border-top mck-u-inline-module-border-bottom"><picture data-component="mdc-c-picture" class="Exhibit_mck-c-exhibit__image__pyIDm"><source media="(min-width: 768px)" srcSet="/~/media/mckinsey/business%20functions/sustainability/our%20insights/climate%20risk%20and%20response%20physical%20hazards%20and%20socioeconomic%20impacts/svgz-mgi-climatechange-ex6.svgz?cq=50&cpy=Center"/><img alt="Urban areas in India and Pakistan could be the first places in the world to experience lethal heat waves." src="/~/media/mckinsey/business%20functions/sustainability/our%20insights/climate%20risk%20and%20response%20physical%20hazards%20and%20socioeconomic%20impacts/svgz-mgi-climatechange-ex6.svgz?cq=50&cpy=Center" loading="lazy"/></picture></div><div class="mck-u-sr-only"></div></div> <ul> <li>Food systems are projected to see an increase in global agricultural yield volatility that skews toward worse outcomes. 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 <a href="/capabilities/sustainability/our-insights/will-the-worlds-breadbaskets-become-less-reliable">projected to increase from 6 percent to 20 percent</a>. The annual probability of a 10 percent or more increase in yield in a given year is expected to rise from 1 percent to 6 percent.</li> <li>Assets can be destroyed or services from infrastructure assets disrupted from a variety of hazards, including flooding, forest fires, hurricanes, and heat. Statistically expected damage to capital stock from riverine flooding could double by 2030 from today’s levels and quadruple by 2050.</li> <li>In parts of the world, the biome, the naturally occurring community of flora and fauna inhabiting a particular region, is expected to shift. Today, about 25 percent of the Earth’s land area has already experienced a shift in climate classification compared with the 1901–25 period. By 2050, that number is projected to increase to about 45 percent. Almost every country will see some risk of biome shift by 2050, affecting ecosystem services, local livelihoods, and species’ habitat (Exhibit 7).</li> </ul> <div data-component="mdc-c-module-wrapper" data-module-theme="default" data-module-background="transparent" data-module-category="" class="mck-c-inline-module-container mck-o-md-center"><div class="mdc-u-grid mdc-u-grid-gutter-lg mdc-u-grid-col-sm-1 mdc-u-grid--align-start mdc-u-mb-3 GenericItem_mck-c-generic-item__sGwKL"><div data-component="mdc-c-content-block" class="mdc-c-content-block___7p6Lu_2734c4f mdc-u-grid-gutter-xs GenericItem_mck-c-generic-item__content__gq1m0"><div class="mck-c-eyebrow mdc-u-ts-10"><span> 7</span></div></div></div><div class="mck-u-inline-module-border-top mck-u-inline-module-border-bottom"><picture data-component="mdc-c-picture" class="Exhibit_mck-c-exhibit__image__pyIDm"><source media="(min-width: 768px)" srcSet="/~/media/mckinsey/business%20functions/sustainability/our%20insights/climate%20risk%20and%20response%20physical%20hazards%20and%20socioeconomic%20impacts/svgz-mgi-climatechange-ex7.svgz?cq=50&cpy=Center"/><img alt="Most countries are expected to experience a biome shift by 2050, affecting ecosystem services, local livelihoods, and species’ habitats." src="/~/media/mckinsey/business%20functions/sustainability/our%20insights/climate%20risk%20and%20response%20physical%20hazards%20and%20socioeconomic%20impacts/svgz-mgi-climatechange-ex7.svgz?cq=50&cpy=Center" loading="lazy"/></picture></div><div class="mck-u-sr-only"></div></div> <div data-component="mdc-c-module-wrapper" data-module-theme="default" data-module-background="transparent" data-module-category="" class="mck-c-disruptor1up mck-o-md-center mck-u-inline-module-border-top mck-u-inline-module-border-bottom mck-u-screen-only" data-layer-region="disruptor-1up"><div class="mdc-u-grid mdc-u-grid-gutter-md mdc-u-grid-col-lg-12 mdc-u-grid-col-md-12 "><div class="mdc-u-grid-col-md-span-12"><header data-component="mdc-c-header" class="mdc-c-header"><div class="mdc-c-header__block___i1Lg-_2734c4f"><h3 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f"><div>Download <a href="/~/media/mckinsey/business functions/sustainability/our insights/climate risk and response physical hazards and socioeconomic impacts/mgi-climate-risk-and-response-full-report-vf.pdf">Climate risk and response: Physical hazards and socioeconomic impacts</a>, the full report on which this article is based (PDF–3.7MB).</div></h3></div></header></div></div></div> <div data-component="mdc-c-module-wrapper" data-module-theme="dark" data-module-background="deep-blue" data-module-category="" data-module-gradient-position="top-right" class="mck-o-edge-to-edge SectionHeader_mck-c-section-header___N7qG mck-c-module-wrapper"><style></style><div data-component="mdc-c-background-image" class="mdc-c-bg-image___GJdv1_2734c4f background-image-section-header-3111815322714024AF2661B65D759EFC-bg SectionHeader_mck-c-section-header__parallax-container__sgMMy" role="img" aria-label="Countries with lower GDP per capita levels are generally more exposed"></div><div class="mdc-c-bg-image___GJdv1_2734c4f mdc-c-bg-image--opaque-bg___CauU1_2734c4f" style="opacity:0.2"></div><div class="mck-o-container"><div class="mck-o-container--wrapped mck-o-container--mobile-spacing"><div id="section-header-5" class="mdc-u-grid mdc-u-grid-col-lg-12 SectionHeader_mck-c-section-header__wrapper__CZEyB"><div class="mdc-u-grid-col-lg-start-2 mdc-u-grid-col-lg-end-12 SectionHeader_mck-c-section-header__wrapper-positioned__fIWpF"><div class="mdc-u-grid mdc-u-grid-gutter-sm SectionHeader_mck-c-section-header__wrapper-text__hSx1f"><div data-component="mdc-c-description" class="mdc-c-description___SrnQP_2734c4f mdc-u-ts-10"><span>Part 5</span></div><h2 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f SectionHeader_mck-c-section-header__heading__2ePOu"><span>Countries with lower GDP per capita levels are generally more exposed</span></h2></div><div class="SectionHeader_mck-c-section-header__section-holder__BaLti"></div></div></div></div></div></div> <p>While all countries are affected by climate change, we find that 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.</p> <div data-component="mdc-c-module-wrapper" data-module-theme="default" data-module-background="transparent" data-module-category="" class="mck-o-md-center Image_mck-c-image__fhx5v"><picture data-component="mdc-c-picture" class="Image_mck-c-image__img-container__JusDB"><source media="(min-width: 768px)" srcSet="/~/media/mckinsey/business%20functions/sustainability/our%20insights/climate%20risk%20and%20response%20physical%20hazards%20and%20socioeconomic%20impacts/climate-risk-inline-1536x.jpg?cq=50&mw=1180&cpy=Center"/><img alt="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. © National Geographic" src="/~/media/mckinsey/business%20functions/sustainability/our%20insights/climate%20risk%20and%20response%20physical%20hazards%20and%20socioeconomic%20impacts/climate-risk-inline-1536x.jpg?cq=50&mw=767&cpy=Center" loading="lazy"/></picture><div data-component="mdc-c-content-block" class="mdc-c-content-block___7p6Lu_2734c4f"><div data-component="mdc-c-description" class="mdc-c-description___SrnQP_2734c4f mdc-u-ts-9 mdc-u-mt-3 Image_mck-c-image__description__nsDz3"><div>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. © National Geographic</div></div></div><div class="mck-u-sr-only">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. © National Geographic</div></div> <div data-component="mdc-c-module-wrapper" data-module-theme="dark" data-module-background="deep-blue" data-module-category="" data-module-gradient-position="top-right" class="mck-o-edge-to-edge SectionHeader_mck-c-section-header___N7qG mck-c-module-wrapper"><style></style><div data-component="mdc-c-background-image" class="mdc-c-bg-image___GJdv1_2734c4f background-image-section-header-F5A025B3A98044BCB2E2782CA2636789-bg SectionHeader_mck-c-section-header__parallax-container__sgMMy" role="img" aria-label="What can decision makers do?"></div><div class="mdc-c-bg-image___GJdv1_2734c4f mdc-c-bg-image--opaque-bg___CauU1_2734c4f" style="opacity:0.1"></div><div class="mck-o-container"><div class="mck-o-container--wrapped mck-o-container--mobile-spacing"><div id="section-header-6" class="mdc-u-grid mdc-u-grid-col-lg-12 SectionHeader_mck-c-section-header__wrapper__CZEyB"><div class="mdc-u-grid-col-lg-start-2 mdc-u-grid-col-lg-end-12 SectionHeader_mck-c-section-header__wrapper-positioned__fIWpF"><div class="mdc-u-grid mdc-u-grid-gutter-sm SectionHeader_mck-c-section-header__wrapper-text__hSx1f"><div data-component="mdc-c-description" class="mdc-c-description___SrnQP_2734c4f mdc-u-ts-10"><span>Part 6</span></div><h2 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f SectionHeader_mck-c-section-header__heading__2ePOu"><span>What can decision makers do?</span></h2></div><div class="SectionHeader_mck-c-section-header__section-holder__BaLti"></div></div></div></div></div></div> <p>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 buildup of risk.</p> <p>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. <a href="https://www.blackrock.com/ch/individual/en/insights/physical-climate-risks">Financial institutions</a> 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.</p>  <p>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.</p> <p>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.</p></div><div class="container-placeholder"></div></div></div><div class="mdc-u-grid mdc-u-grid-gutter-xl"><section role="contentinfo" data-layer-region="article-about-authors" class="mdc-u-grid mdc-u-grid-col-md-12 AboutAuthor_mck-c-about-author__nRJzu"><div class="mdc-u-grid-col-md-start-2 mdc-u-grid-col-md-end-12 mdc-u-grid-col-lg-start-3 mdc-u-grid-col-lg-end-11"><h5 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f mdc-c-heading--title___5qyOB_2734c4f mdc-c-heading--border___K8dj3_2734c4f mdc-u-align-center"></h5><div data-component="mdc-c-description" class="mdc-c-description___SrnQP_2734c4f mdc-u-ts-8 mck-u-links-inline mck-u-links-inline--secondary mdc-u-mt-5"><div><p><strong>Lola Woetzel</strong> is a director of the McKinsey Global Institute, where <strong><a href="/our-people/mekala-krishnan">Mekala Krishnan</a></strong> is a senior fellow. <strong>Dickon Pinner</strong> is a senior partner in McKinsey’s San Francisco office. <strong>Hamid Samandari</strong> is a senior partner in the New York office. <strong><a href="/our-people/hauke-engel">Hauke Engel</a></strong> is a partner in the Frankfurt office. <strong>Brodie Boland</strong> is an associate partner in the Washington office. <strong>Carter Powis</strong> is a consultant in the Toronto office.</p></div></div></div></section><section class="mdc-u-grid mdc-u-grid-col-md-12 mck-u-screen-only"><div class="mdc-u-grid-col-md-start-2 mdc-u-grid-col-md-end-12 mdc-u-grid-col-lg-start-5 mdc-u-grid-col-lg-end-9"><h5 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f mdc-c-heading--title___5qyOB_2734c4f mdc-c-heading--border___K8dj3_2734c4f mdc-u-align-center">Explore a career with us</h5><div data-component="mdc-c-link-container" class="mdc-c-link-container___xefGu_2734c4f mdc-c-link-container--align-center___ar3mu_2734c4f"><a data-component="mdc-c-link" href="/careers/search-jobs" class="mdc-c-button___U4iY2_2734c4f mdc-c-button--secondary___Boipq_2734c4f mdc-c-button--size-large___jwpUy_2734c4f" aria-label="Search Openings" data-layer-event-prefix="CTA Link" data-layer-action="click" data-layer-category="careers" data-layer-subcategory="search" data-layer-text="Search Openings"><span class="mdc-c-link__label___Pfqtd_2734c4f">Search Openings</span></a></div></div></section></div></main></div><div data-component="mdc-c-module-wrapper" data-module-theme="light" data-module-background="lightest-grey" data-module-category="StandalonePromo" class="RelatedArticle_mck-c-article-related__GGA76 mck-u-screen-only" data-layer-region="related-articles"><div class="mdc-o-container__wrapper is-wrapped mdc-u-spaced-mobile"><h5 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f mdc-c-heading--title___5qyOB_2734c4f mdc-u-align-center">Related Articles</h5><div class="mdc-u-grid mdc-u-grid-col-md-3 RelatedArticle_items-container__s2uD0"><div class="mdc-u-grid mdc-u-grid-gutter-lg Card_card__diA2r Card_hover-effect__RGb9b"><div class="Card_wrapper-image__8b4P6"><a data-component="mdc-c-link" href="/capabilities/sustainability/our-insights/will-mortgages-and-markets-stay-afloat-in-florida" class="mdc-c-link___lBbY1_2734c4f"><picture data-component="mdc-c-picture" class="Card_wrapper-image__8b4P6"><style>.picture-uniqueKey-will-0 { aspect-ratio: 16/9 }</style><img alt="Sunken car on a beach in Florida" class="picture-uniqueKey-will-0" src="/~/media/mckinsey/business%20functions/sustainability/our%20insights/will%20mortgages%20and%20markets%20stay%20afloat%20in%20florida/florida-natgeo_974563-standard-1536x1536.jpg?cq=50&mw=767&car=16:9&cpy=Center" loading="lazy"/></picture></a></div><div class="Card_wrapper-text__U6Y3k"><div data-component="mdc-c-content-block" class="mdc-c-content-block___7p6Lu_2734c4f Card_content-block__pF6Z1"><span>Article - 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<i>MGI Research</i></span><h6 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f mdc-u-ts-6"><a data-component="mdc-c-link" href="/capabilities/sustainability/our-insights/a-mediterranean-basin-without-a-mediterranean-climate" class="mdc-c-link-heading___Zggl8_2734c4f mdc-c-link___lBbY1_2734c4f"><div>A Mediterranean basin without a Mediterranean climate?</div></a></h6></div></div></div></div></div></div></div></main></div><script id="__NEXT_DATA__" type="application/json">{"props":{"pageProps":{"locale":"en","dictionary":{},"sitecoreContext":{"route":{"name":"Climate risk and response Physical hazards and socioeconomic impacts","displayName":"Climate risk and response Physical hazards and socioeconomic impacts","fields":null,"databaseName":"web","deviceId":"fe5d7fdf-89c0-4d99-9aa3-b5fbd009c9f3","itemId":"45fa72a9-3648-4f8c-afc6-8ec9e5f64932","itemLanguage":"en","itemVersion":1,"layoutId":"ae753eb4-a035-40b4-83bf-4b4438df6742","templateId":"683910db-02ba-40ba-92e7-726c880160a9","templateName":"ArticleJSS","placeholders":{"jss-main":[{"uid":"232bb7e9-289f-492d-a916-2b6185e44a84","componentName":"ArticleTemplate","dataSource":"","fields":{"data":{"articleTemplate":{"title":{"jsonValue":{"value":"Climate risk and response: Physical hazards and socioeconomic impacts"}},"sEOTitle":{"value":"Climate risk and response"},"description":{"jsonValue":{"value":"How could Earth’s changing climate impact socioeconomic systems across the world in the next three decades? A yearlong, cross-disciplinary research effort at McKinsey \u0026amp; Company provides some answers."}},"sEODescription":{"value":"The climate is changing. Here's what climate risk means for socioeconomic systems across the world in the next three decades."},"displayDate":{"jsonValue":{"value":"2020-01-16T00:00:00Z"}},"body":{"value":"[[DownloadsSidebar]]\n\u003cp\u003e\u003cstrong\u003eAfter more than 10,000 years\u003c/strong\u003e of relative stability\u0026mdash;the full span of human civilization\u0026mdash;the Earth\u0026rsquo;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 (Exhibit 1). In this report, 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.\u003c/p\u003e\n[[Exhibit 1]]\n[[Sidebar 1]]\n\u003cp\u003eWe estimate inherent physical risk, absent adaptation and mitigation, to assess the magnitude of the challenge and highlight the case for action. Climate science makes extensive use of scenarios ranging from lower (Representative Concentration Pathway 2.6) to higher (RCP 8.5) CO\u003csub\u003e2\u003c/sub\u003e concentrations. We have chosen to focus on RCP 8.5, because the higher-emission scenario it portrays enables us to assess physical risk in the absence of further decarbonization. (For more details click on \u0026ldquo;Our research methodology\u0026rdquo;). In this report, we link \u003ca href=\"/capabilities/risk-and-resilience/our-insights/using-model-risk-management-to-address-climate-analytics-its-a-process-not-a-task\"\u003eclimate models\u003c/a\u003e\u0026nbsp;with economic projections to examine nine cases that illustrate exposure to climate change extremes and proximity to physical thresholds. A separate geospatial assessment examines six indicators to assess potential socioeconomic impact in 105 countries. We also provide decision makers with a new framework and methodology to estimate risks in their own specific context.\u003c/p\u003e\n[[disruptor1up sust]]\n[[TableofContents]]\n[[SectionHeader 1]]\n\u003cp\u003eWe find that physical risk from a changing climate is already present and growing. Seven characteristics stand out. Physical climate risk is:\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e\u003cem\u003eIncreasing:\u003c/em\u003e\u003c/strong\u003e In each of our nine cases, the level of physical climate risk increases by 2030 and further by 2050. Across our cases, we find increases in socioeconomic impact of between roughly two and 20 times by 2050 versus today\u0026rsquo;s levels. We also find physical climate risks are increasing across our global country analysis even as some countries find some benefits (such as expected increase in agricultural yields \u003cspan\u003ein countries such as Canada\u003c/span\u003e).\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e\u003cem\u003eSpatial:\u003c/em\u003e\u003c/strong\u003e Climate hazards manifest locally. The direct impacts of physical climate risk thus need to be understood in the context of a geographically defined area. There are variations between countries and within countries.\u003c/p\u003e\n[[PullQuote 1]]\n\u003cp\u003e\u003cstrong\u003e\u003cem\u003eNon-stationary:\u003c/em\u003e\u003c/strong\u003e As the Earth continues to warm, physical climate risk is ever-changing or non-stationary. Further warming is \u0026ldquo;locked in\u0026rdquo; for the next decade because of physical inertia in the geophysical system. \u003ca href=\"https://iopscience.iop.org/article/10.1088/1748-9326/aa98c9\"\u003eClimate science tells us that further warming and risk increase can only be stopped by achieving zero net greenhouse gas emissions.\u003c/a\u003e Furthermore, given the thermal inertia of the earth system, some amount of warming will also likely occur after net-zero emissions are reached.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e\u003cem\u003eNonlinear:\u003c/em\u003e\u003c/strong\u003e\u0026nbsp;Socioeconomic impacts are likely to propagate in a nonlinear way as hazards reach thresholds beyond which the affected physiological, human-made, or ecological systems work less well or break down and stop working altogether. This is because such systems have evolved or been optimized over time for historical climates (Exhibit 2).\u003c/p\u003e\n[[Exhibit 2]]\u0026nbsp;\n\u003cp\u003e\u003cstrong\u003e\u003cem\u003eSystemic:\u003c/em\u003e\u003c/strong\u003e While the direct impact from climate change is local, it can have knock-on effects across regions and sectors, through interconnected socioeconomic and financial systems.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e\u003cem\u003eRegressive:\u003c/em\u003e\u003c/strong\u003e The poorest communities and populations within each of our cases typically are the most vulnerable. Climate risk creates spatial inequality, as it may simultaneously benefit some regions while hurting others.\u003c/p\u003e\n\u003cp\u003e\u003cem\u003e\u003cstrong\u003eUnder-prepared:\u003c/strong\u003e\u003c/em\u003e 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. Adaptation is likely to entail rising costs and tough choices that may include whether to invest in hardening or relocate people and assets.\u003c/p\u003e\n[[SectionHeader 2]]\n\u003cp\u003e\u003ca href=\"https://agupubs.onlinelibrary.wiley.com/doi/abs/10.1029/2018JD029522\"\u003eThe planet\u0026rsquo;s temperature\u003c/a\u003e 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\u0026rsquo;s surface ice cover provides further evidence. \u003ca href=\"https://science.sciencemag.org/content/341/6145/486/tab-figures-data\"\u003eThis rate of warming\u003c/a\u003e is at least an order of magnitude faster than any found in the past 65 million years of paleoclimate records.\u003c/p\u003e\n\u003cp\u003eThe 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 (\u0026ldquo;shifting means\u0026rdquo;), and extremely hot days are becoming more likely (\u0026ldquo;fattening tails\u0026rdquo;). 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). The share of the Northern Hemisphere (in square kilometers) that experiences an extremely hot summer\u0026mdash;three-standard-deviation hotter average temperature in a given summer\u0026mdash;has increased from zero to half a percent.\u003c/p\u003e\n[[Exhibit 3]]\n\u003cp\u003eAverages also conceal wide spatial disparities. Over the same period that the Earth globally has warmed by 1.1 degrees, in \u003ca href=\"https://data.giss.nasa.gov/gistemp/\"\u003esouthern 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\u003c/a\u003e, 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.\u003c/p\u003e\n\u003ch3\u003eThe affected regions will grow in number and size\u003c/h3\u003e\n\u003cp\u003eLooking 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 (Exhibit 4).\u003c/p\u003e\n[[Exhibit 4]]\n[[SectionHeader 3]]\n\u003cp\u003eClimate 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.\u003c/p\u003e\n\u003cp\u003eClimate 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 and includes:\u003c/p\u003e\n[[Sidebar 2]]\n\u003cul\u003e\n \u003cli\u003e\u003cem\u003eLivability and workability.\u003c/em\u003e 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.\u003c/li\u003e\n \u003cli\u003e\u003cem\u003eFood systems.\u003c/em\u003e 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.\u003c/li\u003e\n \u003cli\u003e\u003cem\u003ePhysical assets.\u003c/em\u003e Physical assets like buildings could be damaged or destroyed by extreme precipitation, tidal flooding, forest fires, and other hazards.\u003c/li\u003e\n \u003cli\u003e\u003cem\u003eInfrastructure services.\u003c/em\u003e 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.\u003c/li\u003e\n \u003cli\u003e\u003cem\u003eNatural capital.\u003c/em\u003e 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.\u003c/li\u003e\n\u003c/ul\u003e\n[[disruptor1up dis1]]\n\u003cp\u003eThe nine distinct cases of physical climate risk in various geographies and sectors that we examine, including direct impact and knock-on effects, as well as adaptation costs and strategies, help illustrate the specific socioeconomic impact of the different physical climate hazards on the examined human, physical, or natural system (Exhibit 5). Our cases cover each of the five systems across geographies and include multiple climate hazards, sometimes occurring at the same location. Overall, our cases highlight a wide range of vulnerabilities to the changing climate.\u003c/p\u003e\n[[Exhibit 5]]\n[[Video 1]]\n\u003cp\u003eSpecifically, we looked at the impact of climate change on livability and workability in India and the \u003ca href=\"/capabilities/sustainability/our-insights/a-mediterranean-basin-without-a-mediterranean-climate\"\u003eMediterranean\u003c/a\u003e; disruption of food systems through looking at \u003ca href=\"/capabilities/sustainability/our-insights/will-the-worlds-breadbaskets-become-less-reliable\"\u003eglobal breadbaskets\u003c/a\u003e\u0026nbsp;and \u003ca href=\"/capabilities/sustainability/our-insights/how-will-african-farmers-adjust-to-changing-patterns-of-precipitation\"\u003eAfrican agriculture\u003c/a\u003e; physical asset destruction in \u003ca href=\"/capabilities/sustainability/our-insights/will-mortgages-and-markets-stay-afloat-in-florida\"\u003eresidential real estate in Florida\u003c/a\u003e\u0026nbsp;and in \u003ca href=\"/capabilities/sustainability/our-insights/could-climate-become-the-weak-link-in-your-supply-chain\"\u003esupply chains for semiconductors and heavy rare earth metals\u003c/a\u003e; disruption of five types of infrastructure services and, in particular, the threat of \u003ca href=\"/capabilities/sustainability/our-insights/can-coastal-cities-turn-the-tide-on-rising-flood-risk\"\u003eflooding to urban areas\u003c/a\u003e; and destruction of \u003ca href=\"/capabilities/sustainability/our-insights/reduced-dividends-on-natural-capital\"\u003enatural capital\u003c/a\u003e\u0026nbsp;through impacts on glaciers, oceans, and forests.\u003c/p\u003e\n\u003cp\u003eOur case studies indicate that physical climate risk is growing, often in nonlinear ways. 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 \u003ca href=\"https://www.tandfonline.com/doi/abs/10.1080/17477891.2018.1540343\"\u003egreater exposure to hazards\u003c/a\u003e rather than from increases in the mean and tail intensity of hazards. In the future, hazard intensification will likely assume a greater role. Key findings from our cases include:\u003c/p\u003e\n[[PullQuote 2]]\n\u003cul\u003e\n \u003cli\u003eSocieties and systems most at risk are ones already close to physical and biological thresholds. 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 technical threshold we employed is a three-day heatwave with wet-bulb temperatures of 34 degrees Celsius. At that point, the urban heat island effect could increase the wet-bulb temperature to 35 degrees Celsius. 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). Outdoor labor productivity is also expected to be impacted, reducing the effective number of hours that can be worked outdoors. 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.\u003c/li\u003e\n \u003cli\u003eEconomic 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. For example, supply chains are often designed for efficiency over resiliency, by concentrating production in certain locations and maintaining low inventory levels. Food production is also heavily concentrated; just \u003ca href=\"/capabilities/sustainability/our-insights/will-the-worlds-breadbaskets-become-less-reliable\"\u003efive regional \u0026ldquo;breadbasket\u0026rdquo; areas account for about 60 percent of global grain production\u003c/a\u003e. Rising climate hazards might therefore cause such systems to fail, for example if key production hubs are affected.\u003c/li\u003e\n \u003cli\u003eFinancial markets could bring forward risk recognition in affected regions, with consequences for capital allocation and insurance cost and availability. Risk recognition could trigger capital reallocation and asset repricing and indicates the presence of systemic risk. In Florida, for example, estimates based on past trends suggest that \u003ca href=\"/capabilities/sustainability/our-insights/will-mortgages-and-markets-stay-afloat-in-florida\"\u003elosses from flooding could devalue exposed homes by $30 to $80 billion\u003c/a\u003e, or 15 to 35 percent, by 2050, all else being equal. Rough estimates suggest that this in turn could impact property tax revenue in some of the most affected counties by 15 to 30 percent (though impacts across the state could be less, up to 2 to 5 percent).\u003c/li\u003e\n \u003cli\u003eLarge knock-on impacts can occur when thresholds are breached. These systemic risks come about in particular when the people and assets affected are central to local economies and those local economies are tied into other economic and financial systems. In Ho Chi Minh City, \u003ca href=\"/capabilities/sustainability/our-insights/can-coastal-cities-turn-the-tide-on-rising-flood-risk\"\u003edirect infrastructure asset damage from a 100-year flood\u003c/a\u003e\u0026nbsp;could rise from about $200\u0026mdash;$300 million today to $500 million to $1 billion in 2050, while knock-on costs to the economy could rise from $100\u0026mdash;$400 million to between $1.5 billion and $8.5 billion. In another case, ocean warming could reduce fish catches, for example, affecting the livelihoods of 650 million to 800 million people who rely on fishing revenue.\u003c/li\u003e\n \u003cli\u003eClimate change could create inequality\u0026mdash;simultaneously benefiting some regions while hurting others. For example, rising temperatures may boost tourism in areas of northern Europe while \u003ca href=\"/capabilities/sustainability/our-insights/a-mediterranean-basin-without-a-mediterranean-climate\"\u003ereducing the economic vitality of southern European resorts\u003c/a\u003e. Within regions, the poorest communities and populations within each of our cases typically are the most vulnerable to climate events. They often lack financial means as well as support from public or private agencies. For example, climate events could trigger harvest failure in multiple breadbasket locations\u0026mdash;that is, significantly lower-than-average yields in two or more key production regions for rice, wheat, corn, and soy. This could lead to rising food prices, particularly hurting the poorest communities, including the 750 million people living below the international poverty line.\u003c/li\u003e\n\u003c/ul\u003e\n[[SectionHeader 4]]\n\u003cp\u003eWhile our case studies illustrate the localized impacts of a changing climate, rising temperatures are a global trend and we assess how physical climate hazards could evolve in 105 countries.\u003c/p\u003e\n\u003cp\u003eIn 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. Intensifying climate hazards could put millions of lives at risk, as well as trillions of dollars of economic activity and physical capital, and the world\u0026rsquo;s stock of natural capital. The intensification of climate hazards across regions will bring areas hitherto unexposed to impacts into new risk territory. In particular:\u003c/p\u003e\n\u003cul\u003e\n \u003cli\u003eBy 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). Urban areas in India and Pakistan may be the first places in the world to experience such lethal heatwaves (Exhibit 6). 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. 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.\u003c/li\u003e\n\u003c/ul\u003e\n[[Exhibit 6]]\n\u003cul\u003e\n \u003cli\u003eFood systems are projected to see an increase in global agricultural yield volatility that skews toward worse outcomes. 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 \u003ca href=\"/capabilities/sustainability/our-insights/will-the-worlds-breadbaskets-become-less-reliable\"\u003eprojected to increase from 6 percent to 20 percent\u003c/a\u003e. The annual probability of a 10 percent or more increase in yield in a given year is expected to rise from 1 percent to 6 percent.\u003c/li\u003e\n \u003cli\u003eAssets can be destroyed or services from infrastructure assets disrupted from a variety of hazards, including flooding, forest fires, hurricanes, and heat. Statistically expected damage to capital stock from riverine flooding could double by 2030 from today\u0026rsquo;s levels and quadruple by 2050.\u003c/li\u003e\n \u003cli\u003eIn parts of the world, the biome, the naturally occurring community of flora and fauna inhabiting a particular region, is expected to shift. Today, about 25 percent of the Earth\u0026rsquo;s land area has already experienced a shift in climate classification compared with the 1901\u0026ndash;25 period. By 2050, that number is projected to increase to about 45 percent. Almost every country will see some risk of biome shift by 2050, affecting ecosystem services, local livelihoods, and species\u0026rsquo; habitat (Exhibit 7).\u003c/li\u003e\n\u003c/ul\u003e\n[[Exhibit 7]]\n[[disruptor1up dis2]]\n[[SectionHeader 5]]\n\u003cp\u003eWhile all countries are affected by climate change, we find that 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\u0026mdash;Bangladesh, India, and Pakistan, to name a few\u0026mdash;have relatively low per capita GDP levels.\u003c/p\u003e\n[[Image 1]]\n[[SectionHeader 6]]\n\u003cp\u003eIn 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 buildup of risk.\u003c/p\u003e\n\u003cp\u003eMuch 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. \u003ca href=\"https://www.blackrock.com/ch/individual/en/insights/physical-climate-risks\"\u003eFinancial institutions\u003c/a\u003e 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.\u003c/p\u003e\n[[Video 2]]\n\u003cp\u003eSocieties 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.\u003c/p\u003e\n\u003cp\u003eWhile 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. 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In the future, hazard intensification will likely assume a greater role."},"mediaID":{"value":"2"},"renderMode":{"targetItem":{"key":{"value":"right"},"value":{"value":"right-align"}}},"citation":{"value":""},"enableQuotes":{"boolValue":false},"CTA":{"url":"","linkType":"internal","text":"","target":"","className":"","queryString":"","anchor":"","targetItem":null}}]},"disruptorsignup":{"results":[{"mediaID":{"value":"full-width"},"renderMode":{"targetItem":{"key":{"value":"fullwidth"},"value":{"value":"Full Width"}}},"callToAction":{"url":"/user-registration/register-mvc","text":"Subscribe"},"title":{"jsonValue":{"value":"Stay current on your favorite topics"}}},{"mediaID":{"value":"left"},"renderMode":{"targetItem":{"key":{"value":"left"},"value":{"value":"Left"}}},"callToAction":{"url":"/user-registration/register-mvc","text":"Subscribe"},"title":{"jsonValue":{"value":"Stay current on your favorite topics"}}}]},"articlesidebar":{"results":[{"mediaID":{"value":"2"},"description":{"jsonValue":{"value":"\u003cp\u003eAdditional case studies on climate risk include:\u003cbr /\u003e\n\u003cbr /\u003e\n\u003ca href=\"/capabilities/sustainability/our-insights/reduced-dividends-on-natural-capital\"\u003eReduced dividends on natural capital?\u003c/a\u003e\u003cbr /\u003e\n\u003ca href=\"/capabilities/sustainability/our-insights/could-climate-become-the-weak-link-in-your-supply-chain\"\u003eCould climate become the weak link in your supply chain?\u003c/a\u003e\u003cbr /\u003e\n\u003ca href=\"/capabilities/sustainability/our-insights/will-infrastructure-bend-or-break-under-climate-stress\"\u003eWill infrastructure bend or break under climate stress?\u003c/a\u003e\u003cbr /\u003e\n\u003ca href=\"/capabilities/sustainability/our-insights/can-coastal-cities-turn-the-tide-on-rising-flood-risk\"\u003eCan coastal cities turn the tide on climate risk?\u003c/a\u003e\u003cbr /\u003e\n\u003ca href=\"/capabilities/sustainability/our-insights/will-mortgages-and-markets-stay-afloat-in-florida\"\u003eWill mortgages and markets stay afloat in Florida? \u003c/a\u003e\u003cbr /\u003e\n\u003ca href=\"/capabilities/sustainability/our-insights/will-the-worlds-breadbaskets-become-less-reliable\"\u003eWill the world's breadbaskets become less reliable?\u003c/a\u003e\u003cbr /\u003e\n\u003ca href=\"/capabilities/sustainability/our-insights/how-will-african-farmers-adjust-to-changing-patterns-of-precipitation\"\u003eHow will African farmers adjust to changing patterns of precipitation?\u003c/a\u003e\u003cbr /\u003e\n\u003ca href=\"/capabilities/sustainability/our-insights/a-mediterranean-basin-without-a-mediterranean-climate\"\u003eA Mediterranean basin without a Mediterranean climate?\u003c/a\u003e\u003c/p\u003e"}},"aboutTheAuthors":{"jsonValue":{"value":""}},"headline":{"jsonValue":{"value":"Related Reading:"}},"footnotes":{"value":""},"showShareTools":{"boolValue":true},"backgroundColor":{"targetItem":{"key":{"value":"Lightest Grey"},"value":{"value":"lightest-grey"}}},"gradientDirection":{"targetItem":{"key":{"value":"Bottom Right"},"value":{"value":"bottom-right"}}},"renderMode":{"targetItem":{"key":{"value":"Collapsible"},"value":{"value":"default"}}},"isAboutAuthor":{"boolValue":false},"background":{"targetItem":null},"image":{"src":null,"alt":""}},{"mediaID":{"value":"1"},"description":{"jsonValue":{"value":"\u003cp\u003eIn this report, we measure the impact of climate change by the extent to which it could affect human beings, human-made physical assets, and the natural world. While many scientists, including climate scientists, are employed at McKinsey \u0026amp; Company, we are not a climate modeling institution. Our focus in this report has been on translating the climate science data into an assessment of physical risk and its implications for stakeholders. 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. WHRC\u0026rsquo;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. Here, we highlight key methodological choices:\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e\u003cem\u003eChoice of climate scenario.\u003c/em\u003e\u003c/strong\u003e 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. Four \u0026ldquo;Representative Concentration Pathways\u0026rdquo; (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 (RCP 2.6) to higher (RCP 8.5) CO\u003csub\u003e2\u003c/sub\u003e 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 the absence of further decarbonization.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e\u003cem\u003eCase studies.\u003c/em\u003e\u003c/strong\u003e In order to link physical climate risk to socioeconomic impact, we investigate \u003ca href=\"/featured-insights/climate-change\"\u003enine specific cases where climate change extremes are measurable\u003c/a\u003e. These cover a range of sectors and geographies and provide the basis of a \u0026ldquo;micro-to-macro\u0026rdquo; approach that is a characteristic of MGI research. To inform our selection of cases, we considered over 30 potential combinations of climate hazards, sectors, and geographies based on a review of the literature and expert interviews on the potential direct impacts of physical climate hazards. We find these hazards affect five different key socioeconomic systems: livability and workability, food systems, physical assets, infrastructure services, and natural capital. \u003c/p\u003e\n\u003cp\u003eWe 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. As such, these cases represent leading-edge examples of climate change risk. They show that the direct risk from climate hazards is determined by the severity of the hazard and its likelihood, the exposure of various \u0026ldquo;stocks\u0026rdquo; of capital (people, physical capital, and natural capital) to these hazards, and the resilience of these stocks to the hazards (for example, the ability of physical assets to withstand flooding). Through our case studies, we also assess the knock-on effects that could occur, for example to downstream sectors or consumers. 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. Through this \u0026ldquo;micro\u0026rdquo; approach, we offer decision makers a methodology by which to assess direct physical climate risk, its characteristics, and its potential knock-on impacts.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e\u003cem\u003eGlobal geospatial analysis.\u003c/em\u003e\u003c/strong\u003e In a separate analysis, we use geospatial data to provide a perspective on climate change across 105 countries over the next 30 years. This geospatial analysis relies on the same five-systems framework of direct impacts that we used for the case studies. For each of these systems, we identify a measure, or measures, of the impact of climate change, using indicators where possible as identified in our cases. \u003c/p\u003e\n\u003cp\u003eSimilar to the approach discussed above for our cases, our analyses are conducted at a grid-cell level, overlaying data on a hazard (for example, floods of different depths, with their associated likelihoods), with exposure to that hazard (for example, capital stock exposed to flooding), and a damage function that assesses resilience (for example, what share of capital stock is damaged when exposed to floods of different depths). We then combine these grid-cell values to country and global numbers. While the goal of this analysis is to measure direct impact, due to data availability issues, we have used five measures of socioeconomic impact and one measure of climate hazards themselves\u0026mdash;drought. Our set of 105 countries represents 90 percent of the world\u0026rsquo;s population and 90 percent of global GDP. 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). \u003c/p\u003e\n\u003ch4\u003eWhat this report does not do\u003c/h4\u003e\n\u003cp\u003eSince the purpose of this report is to understand the physical risks and disruptive impacts of climate change, there are many areas which we do not address in this report:\u003c/p\u003e\n\u003cul\u003e\n \u003cli\u003eWe do not assess the efficacy of climate models but instead draw on best practice approaches from climate science literature and highlight key uncertainties.\u003c/li\u003e\n \u003cli\u003eWe 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. \u003c/li\u003e\n \u003cli\u003eAs the consequences of physical risk are realized, there will likely be acts of adaptation, with a feedback effect on the physical risk. For each of our cases, we identify possible adaptation responses. 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.\u003c/li\u003e\n \u003cli\u003eWe 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. \u003c/li\u003e\n \u003cli\u003eWhile 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. There are likely knock-on effects that could occur which our analysis has not taken into account. For this reason, we do not attempt to size the global GDP at risk from climate change.\u003c/li\u003e\n \u003cli\u003eWe do not provide projections or deterministic forecasts, but rather assess risk. The climate is the statistical summary of weather patterns over time and is therefore probabilistic in nature. Following standard practice, our findings are therefore framed as \u0026ldquo;statistically expected values\u0026rdquo;\u0026mdash;the statistically expected average impact across a range of probabilities of higher or lower climate outcomes. \u003c/li\u003e\n\u003c/ul\u003e"}},"aboutTheAuthors":{"jsonValue":{"value":""}},"headline":{"jsonValue":{"value":"Our research methodology"}},"footnotes":{"value":""},"showShareTools":{"boolValue":true},"backgroundColor":{"targetItem":{"key":{"value":"Lightest Grey"},"value":{"value":"lightest-grey"}}},"gradientDirection":{"targetItem":{"key":{"value":"Bottom 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