Physical climate risk: the world is waking up
Climate change is no longer a future threat - it is happening now and it is affecting communities, businesses, and economies.
Climate change is no longer a future threat - it is happening now and it is affecting communities, businesses, and economies.
Climate change is no longer a future threat – it is happening now and it is affecting communities, businesses, and economies.
In 2021, the world was ravaged by a staggering 47 separate billion-dollar weather disasters, with overall damage wrought on the world economy totalling $329bn. This trend continued into 2022, with ten disasters causing economic losses exceeding $3bn in insured losses, including Hurricane Ian ($100bn in insured losses), the European drought ($20bn), and flooding in China ($12.3bn).
It is in the context of this grim new reality that governments and businesses across the world are beginning to wake up to the fundamental importance of understanding physical climate risk. This refers to the potential harm caused by the physical effects of climate change. These risks can be either acute or chronic in nature.
Acute physical climate risks are event-driven, including the immediate and severe impacts of extreme weather events, such as heatwaves, wildfires, hurricanes, droughts and floods. They can cause widespread destruction and disruption, and are often costly to respond to and recover from. These effects can have a wide range of impacts on human and natural systems, including damage to infrastructure and property, loss of life, and disruption of economic activities.
Chronic physical climate risk refers to the gradual and long-term impacts of climate change. Chronic hazards may be less immediately visible than acute events, but they can be just as costly, if not more so. They include slow-onset events such as sea level rise, desertification, changes in weather patterns, and sustained increases to average temperature which lead to long-term changes in the natural environment and affect the livelihoods of people who depend on it.
Though the larger share of global attention and climate finance has been focused on finding ways to reduce emissions, momentum is gathering to bring climate adaptation to parity as increasingly frequent catastrophes highlight the extent to which the planet has already changed.
Emblematic of this shifting climate action landscape is the historical agreement to compensate nations for loss and damage, and the focus on climate finance, at this year’s COP27. However, there are also broader trends and initiatives across the public and private sectors that indicate that longer term priorities are shifting to accommodate a greater focus on physical climate risk and climate adaptation alongside net zero prerogatives.
In the article below, we explore why 2023 will be a watershed year for physical climate risk and why organizations of every kind will need to account for it in their strategy and operations.
Even casual observers of developments in the climate crisis are at least vaguely familiar with the Paris Agreement. Adopted by 196 countries in December 2015, the Paris Agreement was a landmark moment in multilateral climate negotiations and was the first legally binding agreement committing nations to common targets to combat climate change.
The headline outcome of negotiations was the goal agreed by all parties to limit global warming to well below 2, and preferably to 1.5 degrees Celsius, compared to pre-industrial levels. In order to achieve this long-term temperature goal, countries aim to reach peaking global greenhouse gas emissions as soon as possible, with global carbon neutrality to follow by the middle of this century.
The 1.5 degree target has gained remarkable purchase in the public imagination. Since the Paris Agreement came into force in 2016, governments and organizations across the public and private sector have published net zero strategies, with many well-known brands taking steps to make production of their products and services carbon neutral.
Given the focus on global warming and net zero targets, when many people think of action to combat climate change their first thoughts are of efforts to avoid and reduce greenhouse gas emissions. This is called climate mitigation – essentially steps we take to stop the climate crisis from getting worse.
While it is obviously important to drastically reduce global emissions to avert dangerous climate tipping points, an equally important but lesser reported component of climate action is climate adaptation. This refers to measures taken to adapt to the existing consequences of climate change, such as increasing incidences of fires or floods, drought, extreme temperatures, and rising sea levels.
Though adaptation targets were agreed as part of the Paris accords and at subsequent COP summits, these have received relatively little attention by comparison with climate mitigation and funding for adaptation lags far behind that provided for emissions reduction. In its 2022 Adaptation Gap report, the UN reported that funds for climate adaptation in developing countries were five to ten times below what is required.
More generally, adaptation aims to manage climate risk to an acceptable level, but understanding and usage of the physical climate risk data that is necessary to inform risk management strategies remains limited. Protecting assets, reducing exposure, and building resilience in local communities requires accurate modeling of the relevant physical climate hazards, a complex process involving frontier climate science, remote sensing, and multiple datasets.
However, following a year of catastrophic natural disasters that included a summer of record-breaking wildfires in Europe, extreme drought across Africa, and devastating floods in Pakistan, physical climate risk and climate adaptation are finally beginning to receive the attention that is so urgently required.
The themes explored and initiatives announced at COP27 offer a clear example of the way in which physical climate risk and adaptation are beginning to occupy greater space in the thoughts of the various stakeholders gathered at the summit.
Most indicative of the growing momentum behind climate adaptation is the launch of the Sharm El-Sheikh Adaptation Agenda. Launched in partnership with the High-Level Champions and the Marrakech Partnership, it is ‘a comprehensive, shared agenda to rally global action around 30 adaptation outcomes that are needed to address the adaptation gap and achieve a resilient world by 2030’. It is also supported by more than 2000 organizations undertaking related work in more than 131 countries.
The set of targeted outcomes represents the first comprehensive global plan to rally and align both state and non-state actors behind a set of shared adaptation goals. There are 30 ‘Adaptation Outcomes’ in total, set out as urgent global targets for 2030. They are divided thematically into actions designed to improve resilience across five crucial impact systems:
There are also cross-cutting goals that include enabling solutions for planning and finance. Targets include:
These intersecting targets have consequences for every sector of society and the economy. A keen understanding of physical climate risk and access to clear and reliable climate data is essential across the public and private sector for organizations looking to mitigate their exposure, support communities, and take advantage of the opportunities presented by investing in climate adaptation measures.
In another sign that world leaders and policymakers are getting serious about physical climate risk are the major investments announced in early warning systems and various other initiatives designed to mitigate the worst impacts of acute climate hazards.
The most ambitious and far-reaching of these initiatives is the action plan announced by the UN to ensure that everyone on the planet is covered by early warning systems. Countries with limited access to early warning systems have a mortality rate eight times higher than countries with strong coverage, but only 50% of all nations currently have access to such data and technologies. Meanwhile, the need for early warning systems is growing more urgent as the number of recorded disasters has increased five-fold, driven largely by human-induced climate change and related extreme weather events.
In a press release, the UN estimated that its ‘Early Warnings for All’ plan will cost roughly $3.1bn, or the equivalent of 50 cents per person per year between 2023 – 2027. According to the Global Commission on Adaptation, the proposed costs would be ‘dwarfed’ by the benefits provided by wider access to early warning systems. They found that spending $800m on these systems in developing countries would avoid losses between $3bn-$16bn each year. As these systems are a relatively cheap and effective means of protecting lives and assets, investment in early warning systems is touted as the ‘low-hanging fruit’ solution to adapting to our changing climate.
This preparedness-based approach to climate action is shared by other high-profile initiatives launched at COP27. The Global Shield Against Climate Risks, a bundle of activities in the fields of climate risk insurance, climate finance, and disaster prevention is spearheaded by the German BMZ (the Federal Ministry for Cooperation and Economic Development), developed in collaboration with the V20, and unanimously supported by the G7. Key objectives of the Shield include accelerating disbursement of funds to developing nations following climate-related disasters, devising complementary climate risk financing instruments, and mobilizing additional climate finance for vulnerable countries.
One particularly interesting aspect of the Shield is the way its chief architects at the BMZ are proactive in campaigning for what they call a global ‘integrated risk management strategy’. In laying out its vision for the Shield, they argue the following:
‘Germany’s development cooperation not only promotes strong mitigation policies, but also strives to meet the challenge by means of integrated climate risk management…
…Climate risk management is an approach which looks specifically at climate risks as part of a comprehensive risk management strategy; the risks range from extreme weather events such as storms and floods to slow-onset environmental changes such as increasing sea levels and desertification…
…Climate risk management is based on comprehensive and continuous risk assessments. Identifying risks (risk analysis) and then assessing the scale of their impact lays the foundation for prioritizing actions that need to be taken and identifying options that cover as many of the risks as possible.’
The Global Shield and Early Warnings for All initiatives are indicative of how this shift in thinking regarding physical climate risk is being translated into concrete actions in transnational policy. This is also mirrored by activities taking place among national governments, who are becoming increasingly cognizant of the need to coordinate their own bespoke adaptation strategies due to growing annual losses resulting from extreme weather.
For example, the Canadian government recently published its first ever national adaptation strategy, which commits C$1.6bn in federal funding to protect communities and assets against the impacts of climate change. The strategy has five major priorities: improving health, building and maintaining resilient public infrastructure, protecting nature and biodiversity, reducing the impact of climate-related disasters, and supporting the economy.
The government’s forecasts predict that annual economic losses due to climate-related extreme weather could reach C$15.4bn by 2030. The goal is to reduce those losses with federal investment, with research showing that every dollar spent on adaptation measures should save up to C$15 in costs, including direct and indirect benefits across the entire national economy.
In a statement following the announcement of the new strategy, federal Environment Minister Steven Guilbeault said:‘”The fight against climate change has reached our doorstep. We must not only reduce the emissions that cause climate change, we must also adapt to the changes that are upon us”.
With nations far from the frontline of the worst ravages of the climate crisis now sufficiently impacted that they are taking a proactive approach to adaptation, demand for physical climate risk intelligence will continue to grow as organizations seek to support their adaptation strategies.
It’s not just governments and other public institutions that are beginning to think more seriously about physical climate risk. The private sector, and particularly the financial services industry, are also increasingly required to reckon with their exposure to physical climate risk.
Throughout 2022, regulators in multiple jurisdictions including the UK, Japan, Canada, and the European Union took measures to enhance and harmonize climate risk reporting standards, usually in alignment with the TCFD’s recommendations. Many of the recommended disclosures under the TCFD framework require organizations to describe their exposure to physical climate risk, explain their processes for identifying, assessing and managing these risks, and outline the metrics and targets they are using to measure their climate risk management activities.
As these recommendations have become increasingly embedded in various regulatory frameworks, more organizations are compelled to think systematically about physical climate risk.
Standards-setting bodies such as the International Sustainability and Standards Board (ISSB) have made substantial progress in their own work developing a comprehensive global baseline of sustainability reporting standards.
Established at COP26 under the aegis of the IFRS Foundation, the ISSB’s objective is to provide better information for better economic investment decisions. During the previous 12 months, the IFRS has delivered on its commitments to establish the board, consolidate the voluntary disclosure landscape, consult on proposed global standards, and embed a global footprint by establishing functions through its multi-location model and partnership with various international stakeholder organizations.
The ISSB is on track to finalize its new set of global standards in 2023, with several developments and further steps towards implementation announced in November in and around COP27. For example, the board confirmed that they had voted to require companies to use climate-related scenario analysis to report on their climate resilience and identify climate-related risks and opportunities to support their disclosures.
They also shared details of their new Partnership Framework, developed in collaboration with more than 20 organizations, and designed to support capital market participants as they prepare to implement ISSB standards once they are announced in the new year. The framework is supported by a global coalition of public and private organizations, while its primary focus is on facilitating implementation across all economic settings to establish a truly global baseline.
The ISSB is working across jurisdictions to maximize the interoperability of its standards and develop international alignment on key climate disclosures. The board’s work has received substantial endorsement at the policy level, with many jurisdictions signaling a commitment to incorporating the standards into their domestic reporting systems.
For example, a joint statement from the G7’s finance ministers and central bank governors affirmed that they will ‘take steps to operationalise’ the ISSB recommendations and principles in their own jurisdictions. It also reiterated their ‘commitment to move towards mandatory climate-related financial disclosures’ and welcomed the development of a global baseline standard.
Given the momentum behind mandatory disclosures, driven by both the TCFD framework and forthcoming ISSB standards, companies should expect more countries and regions to adopt new reporting standards throughout 2023. It is important for organizations to prepare for what is ahead by following regulatory developments and familiarizing themselves with the data and methodology required to accurately measure their physical climate risk exposure.
As we look to the year ahead, it seems that governments, businesses, and communities are increasingly aligned on the urgency with which society needs to adapt to a climate that continues to change at an accelerating pace.
In order to make informed decisions on strategies to identify and mitigate risk, develop resilience, and protect lives and assets, organizations of every kind will need to integrate physical climate risk intelligence into their workflows.
Physical climate risk data is crucial to adaptation efforts, whether you are a business required by law to quantify and disclosure your climate-related risk exposure, a carbon project developer looking to identify the most resilient site for a long-term sequestration project, or a government agency seeking to implement measures to protect coastal communities from sea-level rise, tropical cyclones, and flooding.
At Sust Global, we are on the mission to transform the latest in machine learning, remote sensing and frontier climate science into the intelligent climate data infrastructure that organizations need to thrive on a changing planet.
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