Climate risk

Climate risk refers to risk assessments based on formal analysis of the consequences, likelihoods and responses to the impacts of climate change and how societal constraints shape adaptation options.[1][2] Common approaches to risk assessment and risk management strategies based on natural hazards have been applied to climate change impacts although there are distinct differences. Based on a climate system that is no longer staying within a stationary range of extremes,[3] climate change impacts are anticipated to increase for the coming decades despite mitigation efforts.[4] Ongoing changes in the climate system complicates assessing risks. Applying current knowledge to understand climate risk is further complicated due to substantial differences in regional climate projections, expanding numbers of climate model results, and the need to select a useful set of future climate scenarios in their assessments.[5]

In the course of increasing global temperature and extreme weather phenomena the Intergovernmental Panel on Climate Change (IPCC) was created by the United Nations Environment Programme (UNEP) and the World Meteorological Organization (WMO) for a better understanding of climate change. Its main aim is evaluating climate risks and exploring strategies for their prevention.

Climate risks

According to the IPCC Fifth Assessment Report: "Impacts from recent climate-related extremes, such as heat waves, droughts, floods, cyclones, and wildfires, reveal significant vulnerability and exposure of some ecosystems and many human systems to current climate variability".[6]

The following future impacts can be expected:

While affecting all economic sectors, effects on single continents will vary. Beside these direct physical climate risks there are also indirect risks:

  • Physical risks: Direct risks of climate change negatively impact agriculture, fisheries, forestry, health care, real estate and tourism. For example, storms and flooding damages buildings and infrastructure, and droughts lead to crop failure.
  • Regulational risks: Governmental endeavours to reduce climate costs have direct effects on the economy. For example, Kyoto-Protocol emissions targets could be realised by implementing emissions trading, requiring the cost of emissions to be quantified monetarily. These costs would be used by companies to evaluate investment decisions. Factoring in emissions costs will cause prices to rise therefore impacting consumer demand. The insecurity of legislation leads to indefinite postponement of projects and investments.
  • Litigational risks: Similar to the tobacco industry, industries producing excessive greenhouse gases (GHG) are exposed to the risk of an increasing number of lawsuits if damages can be correlated to emissions.[7]
  • Competitive risks: If companies do not take measures to reduce climate risks they are competitively disadvantaged. This might lead to increasing production costs caused by obsolete technologies and therefore to decreasing profits.
  • Production risks: Production shortfalls can result from direct or indirect climate risks, i.e., hurricanes damaging oil production facilities can lead to supply disruption and increased prices. Also the price for energy will rise, as heatwaves cause water scarcity, impacting the supply of power plant cooling water.
  • Reputational risks: Companies publicly criticized for their environmental policies or high emissions might lose customers because of negative reputation.[8]
  • Financial risks[9]

References
  1. Adger WN, Brown I, Surminski S (June 2018). "Advances in risk assessment for climate change adaptation policy". Philosophical Transactions. Series A, Mathematical, Physical, and Engineering Sciences. 376 (2121): 20180106. doi:10.1098/rsta.2018.0106. PMC 5938640. PMID 29712800.
  2. Eckstein D, Hutfils M, Winges M (December 2018). Global Climate Risk Index 2019; Who Suffers Most From Extreme Weather Events? Weather-related Loss Events in 2017 and 1998 to 2017 (PDF) (14th ed.). Bonn: Germanwatch e.V. p. 35. ISBN 978-3-943704-70-9. Retrieved 7 December 2019.
  3. IPCC (2018). Global Warming of 1.5°C. An IPCC Special Report. Summary for Policymakers (PDF). Intergovernmental Panel on Climate Change. p. 5.
  4. Chen X (2011-09-01). "Why do people misunderstand climate change? Heuristics, mental models and ontological assumptions". Climatic Change. 108 (1): 31–46. doi:10.1007/s10584-010-0013-5.
  5. Whetton P, Hennessy K, Clarke J, McInnes K, Kent D (2012-12-01). "Use of Representative Climate Futures in impact and adaptation assessment". Climatic Change. 115 (3): 433–442. doi:10.1007/s10584-012-0471-z.
  6. IPCC Working Group II. "Assessing and Managing the Risks of Climate Change" (PDF). Intergovernmental Panel on Climate Change (IPCC).
  7. Setzer J, Byrnes R (July 2019). "Global trends in climate change litigation: 2019 snapshot" (PDF). London School of Economics.
  8. "Transition risk framework: Managing the impacts of the low carbon transition on infrastructure investments" (PDF). University of Cambridge Institute for Sustainability Leadership (CISL). Cambridge University. 2019.
  9. Colas J, Khaykin I, Pyanet A. "Climate Change: Managing a New Financial Risk" (PDF). International Association of Credit Portfolio Managers (IACPM). Oliver Wyman.
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