The impacts from physical climate risk are growing and projected to get worse between now and 2050 unless the world makes serious inroads on its adaptation journey. This dire warning was issued in an environmental, social and governance (ESG) report published by S&P Global Ratings on 27 April 2022, with the main report findings presented during a global webinar, held on 4 May. The findings reflect the firm’s first assessment of country’s exposures to – and ability to adapt to – climate change and are not yet considered as part of the ratings agencies base case scenarios for sovereign ratings.
In Weather Warning: Assessing countries’ vulnerability to economic losses from physical climate risks, the firm warns that between 3.3% and 4.5% of world GDP could be exposed to losses due to the physical impacts of climate change-related weather events, including damage caused by floods, storms and wildfires, to name a few. Estimates are made for each of three climate pathways, labelled: RCP2.6, based on a full implementation of the Paris Agreement; RCP4.5, based on current policies; and RCP8.5, which assumes no adaptation at all.
The emerging threats have been well documented and those operating in insurance and reinsurance will not be able to throw their hands up and exclaim “why were we not warned?” if the worst-case scenarios play out in the next two decades. By way of illustration, the World Meteorological Organisation (WMO) recently reported that a disaster related to weather, climate or water occurred every day in the last 50 years, causing 115 daily deaths and more than $202m in daily losses. And although deaths have decreased threefold over that period, the frequency of loss events has increased fivefold, and the costs related thereto sevenfold.
“The impact from physical climate risk is growing and expected to get worse without adaptation; we are seeing more frequent and more extreme weather events contributing to more damage and greater costs associated with the damage linked to those events, and more people being affected without adaptation,” commented Paul Munday, global adaptation and resilience specialist at S&P Global Ratings.
Munich Re and Swiss Re have published their estimates for global natural catastrophe losses during 2021, at $280bn and $270bn respectively. But these numbers pale into insignificance when compared to the billions of dollars required to make meaningful progress towards the net-zero targets put in place during the COP26 event held in Glasgow, November last year.
“The pace and the scale of adaptation financing, being the finance that is needed to help developing countries adapt to more frequent and severe weather, also lags what is required,” Dr Munday confirmed. In fact, the UNEP Adaptation Gap Report 2021 estimates that adaptation costs for developing countries would amount to $140bn-$300bn per year by 2030, and as much as $500bn annually by 2050.
The S&P presentation offered some useful climate change facts that should help insurers and reinsurers to better understand climate risks. At the outset, it distinguished between acute and chronic climate change risks, with the former encapsulating drought, flooding, severe temperature fluctuations, storms (hurricanes, tropical cyclones and typhoons) and wildfires. Chronic risks, meanwhile, derive from changing patterns of rainfall and temperature as well as rising sea levels. The potential exposure to each of these risk classes varies with geographic location.
We enjoyed the presentation’s forthright assessment of the initiatives born out of COP26 and similar climate change conferences. The S&P Global slide pack included a note from Carbon Brief, COP26, which reads: “If countries meet both conditional and unconditional pledges for the near-term target of 2030, warming could be limited to 2.4C by 2100; or 1.8C if their long-term net-zero promises are met.” Efforts to date, assuming all countries reach their stated targets, will restrict the average annual temperature rise to a sustainable level rather than halt or reverse the temperature rise.
The S&P Global Ratings report findings, some of which we share briefly in the following paragraphs, were summarised globally and at a country level. From a global point of view, south Asia stood out as “more than ten times more exposed than Europe in 2050 under the RCP4.5 scenario”, which would see losses from physical climate risks of as much as 4% of GDP. Lower- and mid-income countries were more at risk to physical climate hazards in each of the three scenarios, bringing Africa, Asia and South America under the microscope.
“Heatwaves will drive exposure of SSA countries, so by 2050 80% of countries in SSA are likely to have more than 45 days of heatwaves per year compared with fewer than 15% currently, and that is coupled with more severe and frequent acute physical risks at the same time,” said Dr Munday. He added that heatwaves tended to lead to lower output-related losses than other weather-related catastrophes, all else being equal. Countries in the Middle East and north Africa, meanwhile, are more exposed to losses due to water stress. A common theme is that the more developed and richer countries in each region are better placed to weather the impact of climate change, though none are spared from severe economic losses.
The S&P Global Ratings report concludes that economic losses resulting from climate change will be unevenly distributed across the globe. “There is a need for increased international cooperation in order to help providing and help building resilience, particularly of those economies that look more vulnerable, [given that] many of those have contributed very little to the cause of the problem to begin with,” said Roberto Sifon-Arevalo, MD at S&P Global Ratings, who added that a country’s exposure to physical climate risks was likely to be more material in the firm’s sovereign rating analysis in future periods.