Climate change is eating the world's GDP in bite-sized chunks

"The world has no choice between avoiding climate change and continuing to bet on the market: in fact, climate change is the market's greatest failure". This powerful statement is taken from the famous Stern Review, produced in 2006 by London economist Sir Nicholas Stern and his team of researchers at the London School of Economics on behalf of the British government.

Considered to be one of the most rigorous and influential studies to date on the impact of the climate crisis on the world economy, the Stern Review concluded that, based on the formal models developed by the IPCC panel of experts, the cost of the damage caused by climate change to the economy could amount to a loss of between 5% and 20% of global GDP by mid-century.

But in addition to revealing the scope of the problem, not from an ecological or environmental point of view, but from a strictly economic one, and detailing in detail the causes of its devastating impact on the markets, the study led by the former vice-president of the World Bank, extended a recipe for preventing the damage from rising to these levels. A treatment based on mitigation and adaptation.

In the study, he said, "to avoid the worst-case scenarios described by science, the estimated economic cost of climate change could be limited to 1% of global GDP". Therefore, it estimated that "investment in climate change mitigation and adaptation over the next 10-20 years will have a profound impact on the economy during the second half of this century, and will most likely worsen in the next century". The report was published 18 years ago. Fair enough, we are very close, but we are still within the range of hope if we decide to act now.

One report after another

Since its publication, studies on the impact of global warming on finance have followed one after another, confirming its conclusions and warning of the need to accelerate adaptation and mitigation measures to avoid worst-case scenarios. The latest has been prepared by the Zurich-based risk analysis team of the Swiss Re Institute.

The report 'Changing climates: the heat is (still) on' insists on describing climate change as one of the greatest threats to the global economy and warns about the increase in economic losses associated with extreme weather events, which are becoming increasingly severe and recurrent. In their analysis, the team of researchers has managed to determine the degree of threat faced by the 36 countries most at risk of suffering such events caused by climate change, as well as to define the new risk landscape facing the entire world. And its conclusions coincide with the forecasts of the Stern Review in 2006, for among them it warns that "if global warming continues on its current trajectory, the world could lose between 7% and 10% of GDP by mid-century".

From forecasts to results

The country most affected by the advance of climate change, with economic losses currently already equivalent to 3% of its GDP, is the Philippines, which at the same time is exposed to a high probability of increased vulnerability. However, with $97 billion in annual losses, equivalent to 0.38% of its GDP, the United States is suffering the greatest economic losses in absolute terms worldwide and faces the most adverse scenarios.

Among those most exposed to the damage caused by the advance of climate change are the Asian countries with the highest economic growth. China, India, Taiwan, Vietnam and Thailand are beginning to record significant losses in GDP. But in addition to threatening emerging and developing countries, a medium to high level of impact on GDP is also beginning to be seen in consolidated economies such as Japan, Austria, Germany, Denmark, Australia, Canada, Chile and Switzerland. Spain does not appear in the study, but France, Greece and Italy do, in this case with a still low, although rising, level of impact.

To address the high degree of threat to global GDP that climate change is reaching, the Swiss Re report rightly emphasizes that "the first step in reducing economic losses is to reduce the potential for such losses through adaptation measures". In terms of cost-benefit ratios, according to the study, "the economic dividends of adaptation measures can exceed their costs by multiples ranging from 2:1 to 11:1."

The important role of insurers

With regard to mitigation actions, basically focused on reducing GHG emissions, the report estimates that a cumulative global investment gap of more than $270 trillion would need to be filled to achieve net zero emissions by 2050 and highlights that there is ample scope for channeling more private capital into this area. The ESG label is not yet in place, and of global new debt issuance, only around 5% is ESG-labeled. In fact, less than 2% of adaptation finance currently comes from private sources.

Reducing carbon emissions is key to containing the economic costs of climate change.

In this section the Swiss Re Institute, owned by the company of the same name, considered one of the world's leading reinsurers, recognizes that the insurance industry can and should offer greater support. "As long-term investors," he points out, "insurance companies can contribute to the decarbonization of the economy, the financing of mitigation efforts and adaptation infrastructure. They can also finance climate-positive projects, share risk knowledge and incentivize effective loss-reduction behaviors."

What this report, like all the others that are appearing on the cost of the climate crisis, demonstrates is that the challenge is undoubtedly great, but the opportunity is no less. It is a matter of understanding what Stern pointed out in 2006, namely that climate change is the greatest enemy of the global economy, and that the financial system should not limit itself to merely assessing its impact on credit portfolios, but should become much more involved in climate action, for example by financing risk prevention and mobilizing more capital towards green and low-carbon investments.

"The world has no choice when it comes to choosing between avoiding climate change or continuing to bet on the market: in fact, climate change is the market's biggest failure." This powerful statement is taken from the famous Stern Review, produced in 2006 by London economist Sir Nicholas Stern and his team of researchers at the London School of Economics on behalf of the British government.