Amid the coronavirus crisis, is now the right time to pay attention to climate change? “Our firm belief,” three of our colleagues recently wrote, “is that we simply cannot afford to do otherwise.”
The need for climate action remains as critical as ever, they explain. Building resilient infrastructure and moving away from fossil fuels, for instance, could help create much needed jobs and spur the economy. “And with near-zero interest rates for the foreseeable future,” our colleagues add, “there is no better time than the present for such investments.”
Earlier this year we published “Climate risk and response: Physical hazards and socioeconomic impacts,” a flagship report that lays out our best thinking around what’s at stake for businesses on climate change. It was widely covered in the press and figured prominently in discussions at this year’s annual World Economic Forum Annual Meeting in Davos.
The report was the culmination of a year-long collaboration between the McKinsey Global Institute (MGI) and our Sustainability and Risk Practices. In honor of Earth Day 2020, we spoke with the report’s authors to learn more about how it came together, why they think it has struck such a chord, and why it’s just as relevant now as ever.
Our firm has a long history of addressing climate change. In 2007, for example, we introduced the carbon cost abatement curve, which provided a comprehensive framework for understanding how to start reducing greenhouse gas emissions.
But according to Dickon Pinner, a McKinsey senior partner and head of our Sustainability Practice, that work hasn’t generated action at scale or speed. “As a result,” Dickon says, “emissions have continued to go up considerably, pushing the level of risk in the system much higher than it once was.”
“Climate risk and response” is our firm’s effort to understand the true extent of that risk. It draws on a detailed and consistent fact base to help leaders around the world make smarter decisions about the future. “Climate science has long predicted the kinds of changes to our environment that we’re seeing today,” says Jonathan Woetzel, who serves as a director of MGI. “Our contribution is figuring out the risks those changes might pose to people and organizations in the future.”
The report focuses specifically on physical risk, which refers to the effects of extreme heat, flooding, and other chronic and acute climate hazards. “We chose to focus on this because it’s a driver of other types of risk, such as the costs associated with transitioning away from carbon or with liability,” Jonathan says.
For their analyses, our colleagues looked at what’s called Representative Concentration Pathway 8.5—a projection of greenhouse gas concentration in the atmosphere. This projection is what climate scientists use to model a world in which emissions continue to rise.
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Three questions to assess your climate risk, with Jonathan Woetzel
That choice was made to illustrate the magnitude of the problem if no actions are taken toward adaptation and abatement, says Hamid Samandari, a McKinsey senior partner and founder of the Americas Risk Practice and the chair of our firm’s Knowledge Council. “It highlights what is likely to be at stake tomorrow if actions are not taken today,” he says.
Using this projection, our colleagues partnered with researchers at Woods Hole Research Center, Willis Towers Watson, Swiss Re, and other organizations to figure out the socio-economic impact these emissions would likely cause by 2030 and 2050.
The potential scenarios are alarming. For example, by 2030, up to 200 million people in India may face a five percent average annual probability of a heatwave that’s not survivable for a healthy human being in the shade. By 2050, this number rises to 480 million people subject to a 14 percent annual risk of lethal heatwaves. Other cases in the report show similar increases in risk levels.
But none of them are foregone conclusions. “It’s important to keep in mind that physical, financial, and behavioral adaption—as well as mitigation—could reduce the risk if those actions are substantial and systematic enough,” says Hamid.
This research provides a new and helpful way of looking at the problem, and tees up a clear plan of action on what we need to collectively embark upon right now.
Dickon Pinner, McKinsey senior partner
Though the bulk of the new report is dedicated to an analysis of climate risk, the final chapter provides some ideas on what to do about it. “The first step is integrating climate science and risk into decision making,” Jonathan says. “Most peoples’ experiences—and many models on which businesses rely—are based on a world with a relatively stable climate. That assumption no longer holds.”
The work doesn’t conclude with the report, the authors say. As our colleagues and people around the world continue to absorb the report’s findings, a whole community of colleagues are ready to help clients across sectors.
Once a business or organization has understood the risk, the next step is to adapt behavior, assets, and finances to risks that are already locked in. The last step, according to the report, is considering the future; only widescale decarbonization going forward can prevent the further buildup of risk.
“Physical risks from climate change are spatial, non-linear, non-stationary, systemic, regressive, and we are under-prepared,” Dickon says. “This research provides a new and helpful way of looking at the problem, and tees up a clear plan of action on what we need to collectively embark upon right now.”