Advancing climate adaptation in Asia: Protecting people, protecting growth

With global warming increasing, the need for global climate adaptation grows daily. In this episode of the Future of Asia Podcast, host Debbi Cheong talks with two McKinsey experts about the challenges surrounding this, particularly in Asia. Advancing climate adaptation globally means spending will have to increase sixfold for a 2°C world by 2050, up from $190 billion today. For leaders, adaptation must become a core part of their strategic agendas.

Recent research from the McKinsey Global Institute (MGI) unpacks the current and future state of advanced climate adaptation. Parts of the world are already severely affected by extreme weather events, and as temperatures rise, hazards will worsen in those areas and spread to other parts of the planet.

With harsh weather conditions mainly occurring in lower-income regions, a spending gap needs to be overcome to meet not only current adaptation needs, but also more extensive ones in the future. Asia, with its large, growing population and many diverse areas, faces differing challenges throughout the region. Yet, this provides an opportunity for emerging Asia to include climate adaptation from the start into its development to protect welfare and increase resilience.

An edited version of the conversation follows.

Debbi Cheong: Hello everyone, and welcome to a new episode of the Future of Asia podcast. Today we’re talking about a topic in which everyone has a stake: climate change.

For decades, Asia has focused on spurring growth, building its cities, expanding industry, and connecting markets. Now an equally important task is emerging: protecting what has been built and the people who live and work within it. Asia has an opportunity to embed climate adaptation early as it continues to invest in urbanization, transportation, energy systems, and industrial upgrading.

MGI recently released new research on advancing adaptation, a first-of-its-kind geospatial analysis of global adaptation needs. In line with that, we have two distinguished guests with us today: Mekala Krishnan, coauthor of the report, and senior partner Yuito Yamada. Please could you introduce yourselves?

Mekala Krishnan: Thanks, Debbi. I’m Mekala Krishnan, a partner with MGI.

Yuito Yamada: Hi, I’m Yuito Yamada, a senior partner in Tokyo working on sustainability and the energy transition with energy companies, governments, and financial institutions.

Debbi Cheong: The MGI report talks about how climate adaptation is not just about major infrastructure such as seawalls or flood defenses, but about a much broader resilience challenge. At a high level, what are the most important takeaways from the research? Mekala, why don’t we begin with you?

Mekala Krishnan: Our starting point [with the report] was to do a geospatial analysis of adaptation needs, not just for the future, but beginning with today. What we found is that the world is already experiencing climate hazards from heat and wildfire to drought and flooding.

All told, this affects about 40 percent of the Earth’s landmass. Four billion people live in places that experience at least one of these kinds of events. And this is not static—that is part of the challenge because the climate is changing. Going forward on our current trajectory of emissions, the world is expected to warm by about 1.5°C by 2030 and about 2°C by 2050 [compared with preindustrial levels].

So, both the hazards today and the anticipated change raise the imperative for adaptation. As the Earth warms, two hazards in particular will become more intense and widespread: heat and drought. As temperatures rise toward 2°C, that 40 percent of landmass that is already exposed will become 80 percent, an additional two billion people will be exposed to heat stress, and one billion more people will be exposed to drought.

Many measures already exist to protect against extreme weather events. These span cooling systems to address different forms of heat, irrigation to address drought, and measures such as undergrounding power lines to address wildfire. All of these measures can help many sectors, as well as ones that can help specific sectors, such as infrastructure resilience improvements, road hardening, and supply chain diversification.

The tool kit that we have is really broad, and that’s good news. The not-so-good news is that we’re not spending enough [on adaptation] today. By our estimates, the world is currently spending about $190 billion annually. This includes both capital costs and operating costs for adaptation. Yet that is not sufficient to protect all the people who are already exposed. If we want to protect everyone experiencing climate hazards today at the standards of developed economies, that $190 billion would need to increase three times, and going forward to 2°C, it would need to increase six times.

Yuito Yamada: What strikes me is that when we talk with companies, we see that many of these measures are already delivering very strong returns. Benefits are about three times today’s costs, on average, and could increase up to seven times as hazards become more severe. Based on that, leaders should treat adaptation as core strategic and capital allocation issues across operations, employees, customers, and supply chains rather than an independent sustainability agenda on the side—it needs to be a part of the holistic strategic agenda. Another important feature that leaders need to think about is partnerships beyond private-governmental discussions to include private-to-private, company-to-company collaborations.

Debbi Cheong: Why are the heat and drought risks becoming so central to the adaptation agenda globally, and what does that mean for how governments and businesses should prioritize action?

Mekala Krishnan: Heat and drought are issues that we may be underestimating for the adaptation agenda, partly because more people and more places will become exposed to heat and drought relative to today. Exposure is going to increase geographically. Places that have not yet experienced extreme heat or drought events and have been relatively insulated from them, such as parts of China, Europe, and North America, will start to experience these types of events in a 2°C world. Places that already experience heat and drought events will start to experience them more intensely and more frequently.

For example, heat stress—which is defined as long, chronic periods of hot and humid conditions—lasts about 12 weeks in places that experience it, on average. That number would go up to 16 weeks at 2°C.

Therefore, more places and more people will become exposed to heat and drought, while the places and people already affected will start to experience them more intensely, frequently, and severely. What this means for adaptation is that measures ranging from air conditioning, passive cooling in buildings, white roofs, urban trees, and irrigation become very, very important parts of the adaptation tool kit going forward.

I mentioned that spending would need to increase by about six times if we are to fully protect ourselves at 2°C, relative to what we’re spending today. That translates to spending of about $1.2 trillion [globally] at 2°C. To put that in context, more than three-quarters of that $1.2 trillion figure would need to be spent protecting against heat and drought.

Yuito Yamada: We also need to address how this could affect not only the global South but also other parts of the world. Researchers have found that outdoor workers’ productivity could fall by as much as 25 percent if hot and humid conditions persist at average daily temperatures of 29.4°C or higher.

Similarly, drought or flooding could slow income growth, for example, for smallholder farmers, by reducing agricultural productivity, which in turn could be an issue for economic growth in countries heavily reliant on agriculture and outdoor workers. This could affect many of the countries that are on the urbanization journey.

Debbi Cheong: Turning to Asia, what makes the adaptation challenge in this region particularly urgent and distinct, whether because of rapid urbanization, population exposure, or development needs?

Mekala Krishnan: Asia is a unique part of the world when it comes to adaptation for a few reasons. As I mentioned, the world would need to spend $1.2 trillion annually on adaptation to protect against climate hazards in a 2°C world. Much of that spending would need to take place in Asia, up to $650 billion annually.

Asia is also unique in the nature of its exposure. It has large populations that are affected by extreme climate events. A lot of adaptation in the region is about protecting people and workers, especially from heat, combined with rapid urbanization and major development needs. This can pose a challenge on the one hand, but also an enormous opportunity on the other, because Asia now has the chance to incorporate adaptation and resilience from the start into new infrastructure and buildings, and in growing its cities.

Yuito Yamada: The scale of adaptation in Asia compared with the global magnitude is large. All parts of Asia are facing adaptation needs, but they are going to be far from uniform. Asia’s areas are truly diverse. Understanding these kind of differences is critical for planning for adaptation.

For example, advanced Asian economies such as Japan and South Korea may prioritize flood defenses and irrigation. In Japan, almost half of the adaptation costs will need to be directed toward flood protection, through measures such as sea dikes or stormwater networks. It’s very different in India and other emerging Asian economies, which will benefit most from expanded cooling. China may need to invest in a mix of flood protection and irrigation, in addition to cooling.

As Mekala mentioned, emerging Asia has the opportunity to embed resilience into urban planning, building standards, and infrastructure from the beginning, unlike mature economies that may need to retrofit legacy systems.

Debbi Cheong: The report highlights that adaptation gaps are not evenly distributed, so lower-income places often face the greatest challenges. How should leaders think about the question of who pays for adaptation, and what does a practical path forward look like?

Mekala Krishnan: At its core, there’s a profound conundrum within the adaptation issue. On the one hand, adaptation is a good buy. We estimate that for every dollar spent on adaptation, a benefit of as much as $3 can be gained in terms of avoided damages today. That rises to about $7 of benefit in terms of avoided damage in the future.

At the same time, the need for adaptation is only going to rise. But there is a resiliency gap. Why is that? Why, despite adaptation being a good buy, might adaptation spending not be happening? And what does that mean in terms of a practical path going forward?

The research shows that a key reason why adaptation is not happening is that competing spending priorities sit at the heart of the challenge in many lower-income parts of the world. On average, regions such as South Asia, Southeast Asia, sub-Saharan Africa, and many different parts of Asia would need to spend as much as 1.5 to 3.0 percent of GDP to adapt to a 2°C world. In places such as Europe and North America, spending needs would be more like 0.5 percent of GDP. Some of that, of course, is that the total GDP in these regions is bigger, but a lot of it is because Asia, parts of sub-Saharan Africa, and other places experience much more intense and severe climate events. This gives a sense of how the spending challenge is much harder. The ability-to-pay question is one that really needs to be addressed as adaptation is driven forward.

However, it’s not just about who has an ability to pay, it’s also about incentives. Who pays is not always who benefits from adaptation. It is also about issues of risk awareness. There is also the nature of adaptation, meaning that benefits come in the form of avoided damage versus a revenue stream and a cash flow. It’s often harder to create incentives and mechanisms to spend around avoided damage.

One way to think about it is to look at who actually needs to pay or who actually benefits from adaptation. As we broke up the $1.2 trillion number, we found that about half of the adaptation costs are tied to private actions, meaning a private actor undertakes a spending and the private actor sees a benefit. As a simple example, when a company invests in a cooling system to keep its buildings cool, it sees the benefit. About 30 percent of adaptation spending relates to public goods, such as sea dikes, levee systems, or detention basins, which protect many people. Then about 20 percent sits in areas such as irrigation that could either be public or private actions, depending on the context.

Parsing the problem into how much is private action, how much is public action, and how much is both is one way to think about what types of measures can be put in place to solve the problem of who pays. Some of that is addressing affordability issues for private actors and addressing risk awareness and incentive issues when it comes to public goods—overall, thinking about how we can create better coordination and alignment across actors to make sure that this happens.

Yuito Yamada: Various issues in the adaptation and risk discussion are important. Number one, there needs to be a mix of actors, including governments, philanthropies, multilateral institutions, insurers, and private investors, rather than any kind of single funding source. Number two, innovative finance models will be key, like results-based payment schemes that can help finance measures such as large flood infrastructure, where incentives are not necessarily aligned currently. Finally, outside of financial outlooks, digital enablement will also be important—obviously through institutional coordination but also by getting more data from companies throughout the supply chain.