Erste Asset Management Investment Blog

Climate risks: why we are not adjusting fast enough

Climate risks: why we are not adjusting fast enough
Climate risks: why we are not adjusting fast enough
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Climate risks are omnipresent. Extreme weather events such as floods, storms and cyclones, rising greenhouse emissions, and natural disasters are risks that the World Economic Forum identified as early as in 2011 as among the top five in terms of events occurring with high probability.

In 2019, already three of the top five risks are classified as hailing from the climate category, and if we look at the impact, even four out of five. In addition to natural disasters and extreme weather events, the second rank goes to our inability to adjust to the consequences of climate change and the directly resulting global water crisis. From our point of view, it is therefore essential to prioritise these problems from a sustainable perspective.

How warm will it get?

The Fourth National Climate Assessment by the USA that came out in November 2018 warns that without a reduction in anthropogenic greenhouse emissions, we could be hit by an increase of 5 degrees Celsius in the average global temperature,  in comparison to preindustrial times. In order to reach the 1.5 degrees target, we have about twelve years for the relevant course correction according to the IPCC (Intergovernmental Panel on Climate Change). Our ecosystems play an important role as well: oceans and forests act as CO2 storage, and their effectiveness is being compromised by global warming. Coastal mangrove forests are an example of our dependence on the functioning of these systems: some 200mn people live and cultivate food in these areas, and they depend on mangroves for protection against storm floods and rising sea levels. The World Wide Fund for Nature has warned that mangroves have been gradually eliminated since the middle of the 20th century, which has resulted in a massive degree of CO2 release, because the CO2 storage capacity of these forests is about three to five times higher than that of terrestrial forests.

climate risk

Source: WEF (World Economic Forum)

Along with marine and terrestrial systems, anthropogenic systems are also directly affected. According to IPCC data, the majority of studies scrutinised shows a negative relationship between crops and climate warming, especially in grain and corn (less so in rice and soy).

What role does the sea play?

Quickly growing cities and the persistent effects of climate change make more people susceptible to the rise in sea levels. By 2050, two thirds of the world’s population are expected to live in cities. The WEF (World Economic Forum) estimates that 800mn people already live in more than 570 coastal cities that are subject to a rise in sea level of 0.5 metres by 2050.

In a vicious circle, urbanisation is not only focused on people and their property in potential regions of damage and disruption, but it also causes these risks to increase – for example by destroying natural sources of resilience such as coastal mangroves and contaminating ground water. The intensified effects make more and more land uninhabitable. According to the report, there are three main strategies to adjust to rising sea levels: 1) engineering projects to contain the water, 2) natural/environmentally-based solutions, and 3) people-focused strategies, e.g. moving households and companies to safer areas, or investing in social capital so as to make communities that are subject to flood risk more resilient.

“The increase of the coastal sea level is one of the gravest social consequences of climate change. The global increase of the average sea level will continue over centuries due to global warming. The detailed progress and the definitive rise depend significantly on the future greenhouse emissions,” as Pavel Kabat, Director of Research at the WMO (World Meteorological Organization) explains.

Good bye, biodiversity?

Climate change adds to the loss in biodiversity. Many affected ecosystems such as oceans and forests are crucial to absorbing carbon dioxide emissions. Increasingly fragile ecosystems also harbour risks for social and economic stability. Given that environmental risks tend to form clusters as they manifest themselves in more frequent and severe ways, the effects on the global value chain will probably increase and weaken resilience overall.

Conclusions of the Global Risk Report

Environmental risks continue to dominate the results of the annual Global Risks Perception Survey (GRPS). The consequences of climate change are becoming clearer by the day. The accelerating loss in biodiversity is particularly worrisome. Since 1970, it has declined by 60%. In the human food chain, the loss in biodiversity affects health and the socio-economic development, which in turn has an impact on well-being, productivity, and even regional safety.

The disruption of production and supply of goods and services due to environmental disasters has increased by 29% since 2012. North America was the region that was hardest hit by environmentally triggered supply chain disruptions in 2017. These disruptions were largely due to hurricanes and forest fires. In the US automotive industry for example, only factory fires and company mergers caused more disruptions to the supply chain than hurricanes that year. Measuring the disruptions by number of suppliers affected rather than number of individual events, the four most important causes of disruptions in 2017 were hurricanes, extreme weather, earthquakes, and floods.

Shifts in the global waste management and recycling supply chain in 2018 could be a foretaste of what is to come. China banned the import of waste from abroad (among it almost 9mn tonnes of scrap plastic) in order to reduce environmental impact. The ban revealed weaknesses in the domestic recycling capacity of many Western countries. In the first half of 2018 alone, the United States sent 30% of the plastic that would have been dumped in China to other countries such as Thailand, Malaysia and Vietnam.


Forecasts are not a reliable indicator for future developments.



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