Four conclusions, three actions, and a bunch of interesting numbers: McKinsey’s take on climate change

My employer, McKinsey & Company, has its own think tank, known as the McKinsey Global Institute. Founded in 1990, the wonks at MGI look at the big issues shaping the global economy, such as urbanization and the future of work. I was an MGI board member for many years, so I am a fan. But it is fair to say that MGI’s research is widely respected. For 4 years, it has been named the world’s top private-sector think tank.

I was therefore interested to read its new report on climate change, which was released on January 16. Done in collaboration with McKinsey consultants (including me) and outside experts, the report, Climate risk and response: Physical hazards and socioeconomic impacts examines the physical effects, such as heat and drought, of climate change on five different areas: livability/workability, food systems, physical assets, infrastructure, and natural capital. MGI seeks to estimate the associated costs, and also suggests actions that might work to change the current trajectory.

MGI evaluates the physical risks associated with climate change, estimates how big the challenge is for two periods (from now to 2030, and 2030-50), and makes the case for action. To do so, it chose to use the higher-emission scenario, known as Representative Concentration Pathway 8.5. Doing so, say the authors, allows them “to focus on measuring inherent physical risk, absent adaptation and mitigation.”

One element I found particularly interesting was the discussion of nine examples of climate risk, including extreme heat and humidity in India, disruption of the food system in Africa, the destruction of infrastructure in Florida and damage to supply chains and natural capital (everywhere). In every case, climate risk discernibly rises by 2030. Finally, MGI does a geospatial analysis of climate risk—to people, economies, and nature—of 105 countries to 2050, representing 90 percent of the world’s population and GDP. It has also developed interesting and detailed models for micro climates just about everywhere.

In short, this is a serious effort, the result of more than a year of work—and it shows. The report is long (131 pages), detailed (200+ footnotes), and stuffed with statistics and graphics. So, while the prose is smooth, this is a somewhat daunting read.

Four conclusions

What follows, then, is an introduction in which I highlight what I consider some of the more interesting arguments and facts. Let’s start with these conclusions.

Climate risk exists literally everywhere. According to the MGI’s analysis, as early as 2030, every country could experience at least one risk indicator out of six examined, such as water stress, the impact of extreme heat and humidity on the ability to work, and vulnerability of physical assets to flooding. In 16 countries, there are rises in 3, and in 44 countries, 5 out of 6 by 2050. Damage from riverine flooding alone could double by 2030. Such risks could threaten literally millions of lives and jeopardize trillions in economic activity. Poorer countries and regions are more likely to be hit harder than richer ones; they tend to be hotter, and rely more on agriculture. Plus, of course, they don’t have as much money to invest in adaptation. Consider Africa: higher temperatures and more drought would likely translate into higher volatility in terms of farm output. In Ethiopia for example, yield shocks in its two major crops—wheat and coffee—could depress GDP by a full 3 percentage points.

These risks are “non-linear.” This means that they are unlikely to increase in a stable manner, by roughly the same degree every year. Instead, this is likely to be a matter of tipping points, in which risks and impacts get more and more severe—and then there is breakdown. For example, buildings might be built to withstand a certain level of flooding. But if, year after year, the rains get worse and worse, at some point, the buildings just can’t take it any more. Or think about the glaciers. A certain degree of melt can be absorbed; a general meltdown might be too much. The extent to which climate change is changing the dynamics of ecosystems, and destroying natural capital—such as glaciers, and also entities like forests and oceans—on which so much of life depends, is the great unknowable. But the idea of non-linearity is frightening; it means that many places could muddle through for quite some time—and then all of sudden, things could get really, really bad.

There will be many kinds of knock-on effects. For example, the report notes that flooding in Florida not only destroys homes and infrastructure, but also has effects on property values, insurance rates, tax collection, mortgage finance, and the value of municipal bonds. If one link in a manufacturing supply chain is disrupted, that affects all the others. If a tornado knocks down bridges, that damages all the transport that depends on them. If heat changes grape production, traditional wine-growing regions could suffer—and new ones benefit. No one seriously questions the idea of knock-on effects. By their nature, though, they are unpredictable, which is one of the reasons why estimating the costs associated with climate damage is so difficult.

The world is not ready. Yes, there has been action to anticipate and meet the risks associated with climate change. But not nearly enough. Underinsurance is rife: Only 50 percent of losses today are insured, a figure that would likely get much worse if more, and more extreme, weather events become the norm. And if MGI is right, as climate impacts get worse, the cost of adaptation will rise. The report looked at 17 different types of infrastructure assets—everything from nuclear plants to data centers to wastewater treatment centers—and concluded that every single one was vulnerable to climate hazards. Of the world’s 100 busiest airports, a quarter are less than 10 meters above sea level

Three approaches

That, broadly, is the problem. What are the answers? The report does not go into detail, but does suggest three things that business and government can and should be doing:

Integrate climate risk into decision-making. Two or three decades ago, who considered cyber-security a big risk? Today, who doesn’t? Like cybersecurity, climate change is something that has been known about for years, but its importance is now touching on more and more dimensions. For business, that includes how and where to invest and what kinds of products and services to produce. Essentially, every time a major decision is being considered, someone at the table should be asking: but what does that mean in terms of climate trends? For any such decision to be made sensibly, more and better information is required—or as MGI puts it, “a robust quantitative understanding.” This doesn’t just mean data and metrics—although of course they are important. It means a new mindset. The traditional assumption that while the weather is variable, the climate is stable, can no longer be relied on, says MGI. In addition, businesses and civic leaders operate in a specific geographic context—a city, country, or region—and decisions need to reflect the particular risks in each place. So, it’s complicated. But the need to compile the right information and then to act in accordance with the best possible analysis is acute, and getting more so.

Accelerate the pace and scale of adaptation. The term “adaptation” refers to protecting people and property; improving resilience; reducing exposure to risk (for example by relocating assets) and devising economic and financial structures to encourage related investment. The need for adaptation is true for societies in general, and the business sector in particular. For example, if part of a company’s supply chain is in a country prone to flooding, it might make sense to harden these assets against climate impacts (for example by building on higher ground or installing backup power), to diversify sources, or both. Assuming MGI is right that climate risks will accumulate over time, the implication is that  business will need to take climate into account in just about all building and other capital expenditures. For governments, adaptation could require making unpopular trade-offs and/or imposing new restrictions—two things few politicians love. For example, it might make sense to ban development in flood plains or to raise standards, and thus costs, for buildings and infrastructure. Adaptation is not cheap - the Global Commission on Adaptation has calculated that from 2020 to 2030, $1.8 trillion is needed to make the necessary investments in adapting to a changing climate.

Decarbonize in a big way. Reducing the build-up of greenhouse-gas emissions and then reversing them, is essential to safeguard the climate. Under the 2015 Paris climate agreement, most of the world’s countries said they would take measures to limit the accumulation of GHGs so that temperatures rise no more than 2 degrees (and preferably 1.5 degrees) by 2050. But that isn’t happening globally at the moment, and in the countries where it is, it is not happening fast enough. According to the report, scientists believe there is the “carbon budget” for 2 degrees which will be used up in 20 years. That can be done in two ways—reducing the volume of GHGs that go into the atmosphere and also taking GHGs out. MGI does not spell out the best ways to decarbonize; that is a different, complicated subject beyond the scope of this report. McKinsey, however, has done a lot of work on it, and I have also touched on it a number of times. But the point is clear, and simple: “Beyond 2030, climate science tells us that further warming and risk increase can only be stopped by achieving zero net greenhouse gas emissions.”

Nine interesting numbers

That is the high-level view from MGI. But one of the reasons I found this report so compelling—and that many non-energy geeks might, too—is the sprinkling throughout of fascinating factoids. Here are a few of my favorites:

• About 1.5 percent of global GDP is now at risk from what MGI calls “decreasing workability” associated with climate change; think, for example, of people who are so hot that they have to take more breaks, and work with less energy. By 2050, MGI says that could be 2 to 3.5 percent of GDP, or up to $6 trillion at risk. In some countries, up to 15 percent or more of GDP could be at risk.
• By 2050, if emissions do not fall drastically, Madrid’s climate in 2050 is likely to be like Marrakech’s today.
• During Hurricane Sandy, which took place in the New York/New Jersey region in 2012, 11 billion gallons of sewage were released as coastal wastewater systems were overwhelmed.
• In the Hindu Kush, 240 million people rely on glaciers for their water supply. So it is worrying that glacial mass is expected to decline 10 to 25 percent by 2030, and by 20 to 40 percent in some areas by 2050.
• By 2050, ocean warming could reduce fish catches by about 8 percent by 2050. That hurts the 650 million people (minimum) who rely on fishing in some way for their livelihood. And it also hurts those who rely on fish for nutrition by raising prices. 
• The rate of global warming is running at about 0.2 degree Celsius every 10 years; Arctic sea ice is being lost at a rate of 3,000 cubic kilometers over the same period. This rate of warming is discernibly faster than any “currently identified in the past 65 million years of paleoclimate records and could be unprecedented as far back as 250 million years.”
• The share of time spent in drought conditions is expected to rise from 8 percent now to 10 percent by 2050.
• Some regions could see positive effects. While US agricultural yields, for example could drop by more than 10 percent by 2050 (compared to 1998–2017), in Canada, yields could increase 50 percent over the same period. Yields in Europe/Russia could rise 4 percent by 2050 (compared to 1998-2017).
• Egypt, Iran, Mexico, and Turkey are highly “water-stressed,” a term that describes the ratio of annual demand to supply. Water stress will increase on average by 47 percentage points between today and 2050 for these countries, and so is the frequency of drought.

And there is, of course, much, much more … but you get the idea.

All views are mine and not those of McKinsey & Company.