MGI Research

Reduced dividends on natural capital?

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The world’s stock of natural resources performs a range of services that are essential to human well-being. But climate change is accelerating the depletion of natural capital.

Natural capital provides the world’s population with a variety of critical services. These include ecosystem services (providing goods such as food, fiber, fuel, water, and wood), regulating environmental conditions (by controlling pollution, protecting against natural hazards like floods and forest fires, and purifying water, among others), and supporting recreation, spiritual fulfillment, aesthetic enjoyment, and other cultural practices.

But climate change accelerates the depletion of natural capital and ecosystem services as it alters major geophysical conditions—average surface temperatures, ocean body temperatures, precipitation patterns, the oxygen content and acidity of seawater—too quickly for natural systems to adapt. When these changes reach thresholds that ecosystems can no longer sustain, natural capital and ecosystem services often degrade along a nonlinear path.

It is particularly hard to manage natural capital losses. The time between human actions that affect natural capital and the environmental and ecological responses to those actions can be long. Problems that occur within ecosystems can be hard to diagnose and understand because the systems are so complex. And traditional economic measures discount natural capital by recording only positive outcomes from the depletion of natural capital (for example, the GDP contributions of the fishing industry), and none of the negative outcomes (such as the impact on marine species).

These trends are having significant effects on three major types of natural capital that we examine in this case study: glaciers, oceans, and forests. Determining the potential socioeconomic impact from natural capital destruction is challenging due to the manifold and complex ways that societies depend on the natural world.

As result, in this study, we highlight the enormous dependency many communities have on natural capital, for example on the water people drink or on fishing and tourism to provide livelihoods, identify the pace of natural capital destruction in parts of the world such as the Himalayas, and how that might continue in the next few decades (see sidebar, “An overview of the case study analysis”). We also explore possibilities for combating natural capital destruction.

Glaciers are melting, and the change has begun to disrupt crucial supplies of freshwater

Glaciers play an essential part in regulating the supply of freshwater. More than one-sixth of the world’s people depend on glacier-fed rivers for drinking and irrigation water. But glaciers are losing mass at an unprecedented rate in most parts of the world. In the long run, the shrinking of glaciers is expected to reduce freshwater availability, leading to large socioeconomic impacts in sectors such as agriculture, hydroelectricity, and tourism.

Looking closer at the Hindu Kush Himalayan region, we found it faces significant physical and socioeconomic risks as a result of glacial melting. The region covers eight countries, from Afghanistan in the west to Myanmar in the east. Its glaciers provide water for irrigation, energy generation, and other economic activities for the region’s 240 million residents and about 750 million people in total. The melting of Himalayan glaciers has doubled since 2000, and more than a quarter of glacial ice in negatively affected regions has been lost in the past four decades. Glacial mass in this region could drop by about 10 to 25 percent by 2030, and by 20 to 40 percent by 2050 in some subregions. The region already faces severe danger of catastrophic flooding.

The risk of floods poses an immediate threat to human populations. Climate dependent sectors, such as agriculture, will also be threatened. The consequences could be severe for countries such as India, which has the world’s 13th-highest level of water stress and a population three times greater than the total population of the 17 other countries with high water stress. Altered river flows are likely to disrupt food and water supplies and could cause mass population displacements and heighten geopolitical tensions and the risk of conflicts over the management of water and the construction of river dams.

For the Hindu Kush Himalayan region, integrated water planning and management across sectors (such as energy, land, forest, ecosystems, and agriculture) could make water use more efficient and reduce environmental impacts. More water storage could help when discharges are low. Physical protections (such as flood-prevention structures, better irrigation systems, upgraded canals, precision land leveling, and proper implementation and enforcement of building codes) and management tools (such as land-use planning laws and early-warning systems) are also needed to manage risk.

Oceans are warming and undergoing chemical changes, with harmful consequences for marine life and coastal communities

Covering more than 70 percent of the Earth’s surface, oceans provide important ecosystem services. They transport heat between the equator and the poles, which helps regulate the climate and global weather patterns. They generate over half of the world’s oxygen and currently absorb roughly 30 percent of fossil fuel CO2 emissions, acting as an important carbon sink that slows the rise in atmospheric CO2. Marine fisheries and aquaculture produce about 15 percent of the animal protein consumed by 4.3 billion people and support the livelihoods of approximately 650 million to 800 million people globally. Coral reefs attract tourists, who generate economic activity, as well as anchoring certain marine ecosystems.

Globally, the rate of ocean warming doubled from 1969–93 to 1993–2017. Ocean warming is increasing the frequency and duration of marine heat waves that can strongly affect marine ecosystems, such as seagrass and kelp forests, which contain significant amounts of carbon. Ocean warming also causes seawater to release stored oxygen. The increasing concentration of COin the atmosphere causes the ocean to absorb more CO2, which makes seawater more acidic. Warming, deoxygenation, and acidification change the oceans’ circulation patterns and chemistry.

Warmer and more acidic oceans have a direct impact on marine species by altering important ecosystem-level processes (for example, primary productivity, reef building, and erosion) as well as physiological processes of marine species and organisms (such as skeleton formation, gas exchange, reproduction, growth, and neural function). Marine creatures, particularly fish and zooplankton, are migrating to higher latitudes, where they engage in seasonal behaviors such as reproduction at different times than in the past. This is having an impact on societies and economies. For example:

Fisheries have been put under stress

According to one estimate, ocean warming reduced the maximum sustainable global yield of seafood by 4 percent between 1930 and 2010. Yields have fallen by even more in certain areas: in the Sea of Japan and the North Sea, as much as 35 percent. Climate change is forecast to lower fish catches by about 8 percent and associated revenues by about 10 percent or $6 billion to $15 billion (including ranges) by 2050 under RCP 8.5.

Coral reefs have suffered from bleaching and subsequent dying

These impacts have harmed wildlife communities that occupy coral reefs and diminished the habitats of other species. The destruction of coral reefs could also lessen tourism, depriving coastal communities and related sectors of much-needed income. For example, half of Australia’s Great Barrier Reef’s coral has died, and further dying could impede tourism, which accounts for an estimated $35 billion a year of economic value.

Experts have suggested that mitigating pressures (such as pollution, commercial fishing, invasive species, and coastal habitat modification) could reduce and delay the effects of climate change on the world’s oceans. Increased international cooperation could ease adaptation to variation in the productivity of global fisheries. To increase the resilience of coral reef fisheries, experts recommend managing catchment vegetation to improve coastal water quality, maintaining connectivity of coral reefs with mangrove and seagrass habitats, sustaining and diversifying the catch of coral reef fish, and transferring fishing activity to pelagic fish resources. Scientists are investigating measures to restore coral reefs, such as selective breeding, assisted gene flow, conditioning, epigenetic programming, and manipulation of the coral microbiome.

Climate change is exacerbating the pressure on the world’s forests

Approximately 1.6 billion people depend on forests, which cover nearly one-third of the world’s land, to make their living. Some studies suggest that forests and trees furnish rural households in developing countries with about 20 percent of their income. Some 2.4 billion people use wood as fuel to cook, boil and sterilize water, and heat their dwellings. Forests also have tremendous ecological importance. They are the habitats for more than three quarters of the world’s species, and they store up to 45 percent of all the carbon found on land. And, like oceans, forests act as important carbon sinks; the biosphere currently absorbs approximately 30 percent of fossil fuel CO2 emissions, with the majority stored in forests and mangroves.

Researchers studied the link between climate change and forest disturbances due to wind, snow and ice, fire, drought, insects, and pathogens. Their research showed that climate change most likely has a triggering or intensifying effect on disturbances—57 percent of the observations in the studied literature were related to direct impacts of climate change on disturbance processes. Disturbances can also feed back into climate change—wildfires emit large quantities of CO2 and thus exacerbate the rate of change in the climate.

Because forests take a long time to grow but then live for decades or longer, they are likely to face risks from both changes in mean climate variables and extreme weather events like prolonged drought, storms, and floods. This is especially relevant when considering that fires, drought, and insect activity are likely to increase in warmer and drier conditions. Climate change, a result of human activity, worsens wildfires by making forests hotter and drier.

Forests can be protected by altering forest structures to reduce the frequency or severity of wildfires. It is also possible to maintain wildlife refuges capable of resisting ecological changes and to protect ecologically significant areas such as spawning grounds and highly biodiverse habitats.

As climate change accelerates, losses of natural capital are expected to mount, reducing ecosystem services and affecting local and national economies. Nevertheless, some solutions can help protect natural capital from climate risks and harmful human activities (such as deforestation), restore depleted natural capital, and limit the socioeconomic impacts of natural-capital losses. Maintaining natural capital and ecosystem services will require more than the protection of individual stocks of natural capital, such as single species. It will require measures to protect and restore entire ecosystems and, critically, in many instances a coordinated international response, for example in the case of ocean warming.

For additional details, download the case study, Reduced dividends on natural capital? (PDF–949KB).

About this case study:

In January 2020, the McKinsey Global Institute published Climate risk and response: Physical hazards and socioeconomic impacts. In that report, we measured the impact of climate change by the extent to which it could affect human beings, human-made physical assets, and the natural world over the next three decades. In order to link physical climate risk to socioeconomic impact, we investigated nine specific cases that illustrated exposure to climate change extremes and proximity to physical thresholds.

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