A climate change wake-up call
Climate change can lead to large-scale economic knock-on effects, says a McKinsey Global Institute report.
21 Jan 2020
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Heat-exposed work has produced about half of India’s GDP, and employs about 75 percent of the labor force. There will be a need to shift working hours for outdoor workers and undertake heat management efforts (Image: Ian D Keating, Flickr Commons, CC BY 2.0)

A new McKinsey Global Institute report, ‘Climate risk and response: Physical hazards and socioeconomic impacts’, suggests that many assumptions about the potential damage climate risk could cause need to be revisited. The report finds that climate change is already having substantial physical impacts at a local level in regions across the world, and the affected regions are likely to grow in number and size.

Hundreds of millions of lives, trillions of dollars of economic activity, and physical and natural capital may be at risk in a higher emissions and lower mitigation scenario, and an absent adaptation response. The report further finds that under a high emission, low mitigation RCP 8.5 (Representative Concentration Pathway) scenario, India could become one of the first places in the world to experience heatwaves that cross the survivability limit for a healthy human resting in the shade, potentially impacting millions of people with knock-on socioeconomic effects.

As heat and humidity increase, this also could affect labor productivity in outdoor work. As of 2017, the report notes, heat-exposed work has produced about half of India’s GDP, and employs about 75 percent of the labor force. 

The result of a yearlong research effort in collaboration with McKinsey’s Sustainability and Risk practices, this report focuses on physical risk—that is, the risks arising from the physical effects of climate change, including the potential effects on people, communities, natural and physical capital, and economic activity, and the implications for companies, governments, financial institutions, and individuals.

The report draws on climate model forecasts to highlight how the climate has changed and could continue to change, how this creates new risks and uncertainties, and what steps can be taken to manage them.

Findings include:

  • Risk of extreme heat and humidity could impact India in a “nonlinear” way. One of the unrecognized aspects of climate change is its “nonlinear” characteristics. Socioeconomic systems have evolved or been optimized over time for historical climates. Societies and systems most at risk are close to physical and biological thresholds. Once thresholds are breached, impacts could be nonlinear. For example, the number of people living in areas with some likelihood of experiencing a lethal heatwave could rise from zero today to 250 million to 360 million by 2030, with a 9 percent annual probability of occurring, and to 700 million to 1.2 billion by 2050 with a 14 percent annual probability of occurring (under an RCP 8.5 scenario and not factoring in air conditioner penetration).
Knock-on impacts from climate hazards could affect employment, incomes, and connected sectors. The report further estimates that the effective number of outdoor daylight hours lost in an average year because of diminished labor productivity would increase by about 15 percent by 2030, compared with today, potentially causing a reduction in GDP of between 2.5 and 4.5 percent by 2030. By 2050, both the intensity and exposure to lethal heatwaves, as well as the impact on outdoor work could increase in a non-linear way.
  • Given this increase in risk, the report finds there is also likely to be an adaptation response, for example by shifting working hours for outdoor workers, undertaking heat management efforts in cities, establishing early-warning systems and cooling shelters to protect people, and, at the extreme, movement of people and capital from high-risk areas. The report estimates that addressing some of the risk of lethal heatwaves by 2030, using air conditioning, could cost up to $110 billion.
  • India will need to adapt through capacity and knowledge building, investment in adaptive technology and infrastructure, and supporting the economy’s transition away from outdoor work. The government is already taking steps towards this and last year released the India Cooling Action Plan in March 2019, making India the first major country in the world to release a national policy document on cooling, the report notes.

“Both public and private sector stakeholders have an important role to play in developing and delivering the necessary solutions. Investing in heat management will be critical, and the private sector can play an important role in driving innovation. Adaptation will be particularly challenging for the urban poor, who will likely require public support, for example in the form of emergency shelters,” says Rajat Gupta, a senior partner in McKinsey’s Mumbai office.

Countries and regions with lower per capita GDP levels are generally more at risk. Poorer regions often rely more heavily on natural capital, work more outdoors, and have climates closer to physical thresholds. Climate change could also benefit some regions. For example, rising temperatures could improve crop yields in Canada.

What can be done?

Addressing physical climate risk will require more systematic risk management, accelerating both adaptation and decarbonization. All key business and policy decisions need to be examined through the lens of climate change. Adaptation can help manage risks, even though this could prove costly for affected regions and entail hard choices. Preparations for adaptation—whether seawalls, cooling shelters, or drought-resistant crops—will need ongoing and collective attention, particularly about where to invest.

While adaptation is now urgent, and there are many adaptation opportunities, climate science tells us that further increases in warming and risk can only be stopped by achieving zero net greenhouse gas emissions.

“While this report demonstrates the tremendous consequences that a changing climate could have on individuals, companies, and countries, it also provides a roadmap for decision-makers to take action,” said Mekala Krishnan, a senior fellow at the McKinsey Global Institute. “We should never underestimate the ingenuity of humans – the risks of climate change are knowable, and this information is the first step to finding solutions.”

The complete report, including detailed findings, the specific case studies and recommendations for change, is available below.

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