Economy

'Urgent' need for businesses to adapt to growing threat from climate change, McKinsey says

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Key Points
  • McKinsey said trillions of dollars in economic activity and hundreds of millions lives are at risk from a changing climate.
  • "Much as thinking about information systems and cyber-risks has become integrated into corporate and public-sector decision making, climate change and its resulting risks will also need to feature as a major factor in decisions," McKinsey Global Institute director Jonathan Woetzel said.
  • BlackRock CEO Larry Fink warned this week that the intensifying climate crisis will bring about a fundamental reshaping of finance, with a significant reallocation of capital set to take place "sooner than most anticipate."

As the climate crisis intensifies and as the wide-ranging economic impacts are felt up and down supply chains across continents, business leaders and governments cannot ignore the mounting economic risks, a report from McKinsey said Thursday.

"Much as thinking about information systems and cyber-risks has become integrated into corporate and public-sector decision making, climate change and its resulting risks will also need to feature as a major factor in decisions," McKinsey Global Institute director Jonathan Woetzel said in a statement.

A dog looks out of a house flooded by Hurricane Maria, in Catano town, Juana Matos, Puerto Rico, on September 21, 2017.
Hector Retamal | AFP | Getty Images

The study focused on the physical effects of climate change, including on individuals and communities, as well as infrastructure and natural capital, and found that the knock-on effects from a changing planet are accelerating.

This is primarily because while direct impacts such as hurricanes might be felt locally, the repercussions can get kicked down the supply chain and have surprising effects as communities become more interconnected.

In Florida, for instance, rising tides could cut property values and reduce tax revenue. Or in India, McKinsey found that rising temperatures — and the subsequent hours of labor lost due to unsafe conditions — could shave as much as 4.5% from annual GDP.

Around the world, rising ocean temperatures could reduce fish harvests, thereby impacting as many as 800 million people worldwide who rely on revenue from the industry.

The study said trillions of dollars in economic activity and hundreds of millions lives are at risk. The impacts are already being felt — fires are raging in Australia and hurricanes have become ever more destructive.

Lack of preparation

Businesses are failing to properly account for the cascading effects, leading to heightened exposure, the report says.

"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," the report said. "Adaptation is likely to entail rising costs and tough choices that may include whether to invest in hardening or relocate people and assets. It thus requires coordinated action across multiple stakeholders."

Earlier this week, BlackRock CEO Larry Fink warned in his annual letter to chief executives that the intensifying climate crisis will bring about a fundamental reshaping of finance, with a significant reallocation of capital set to take place "sooner than most anticipate."

The McKinsey researchers found that physical hazards can typically be classified as heavily impacting one of five categories: livability and workability, food systems, physical assets, infrastructure services, and natural capital.

To look beyond the headline numbers to determine how these hazards would be felt, the firm studied nine specific test cases, such as wheat and coffee production in Ethiopia, infrastructure vulnerability in coastal cities like Bristol in Britain and in Vietnam's Ho Chi Minh City, as well as glacial melt in the Hindu Kush region of the Himalayas.

In the past, greater exposure to hazards typically led to higher risks. But now, climate change is making one-off events like hurricanes grow in magnitude, which means the impact is more widely felt.

This means that systems currently in place, and optimized for a certain level of risk, are "vulnerable." The firm did note that some places could benefit from warmer temperatures. Canada could see crop yields increase, for example, while tourism in Northern Europe could increase.

McKinsey said it's imperative for leaders to focus on greater adaptation and risk management, as well as wide-scale decarbonization efforts.

"Climate change affects human life as well as the factors of production on which our economic activity is based and, by extension, the preservation and growth of wealth," the report said.