Irene Lauro (Schroders) | According to the World Meteorological Organization, the past six years (2015–2020) have been the warmest on record, with global average temperatures rising 1.2 °C above pre-industrial levels.
more While climate change affects all regions of the world, the rate of global warming and precipitation will not be evenly distributed around the world. There will be winners and losers.
The Intergovernmental Panel on Climate Change (IPCC) seeks to better understand the specific risks of climate change. To do this, they modeled the amount of greenhouse gases (GHGs) that we generate to generate many climate change scenarios, or trajectories, called representative concentration pathways (RCPs). Each scenario corresponds to a different level of warming.
RCP2.6 is a “best case” scenario. In this scenario, GHG emissions are reduced enough that global warming is limited to about 1.5 to 2 degrees above the pre-industrial average. At the other end of the scale is RCP8.5. This is the “worst case” scenario. Refers to “business as usual”in which no effort is made to control emissions. The scenario describes an increase in global temperature to 4 degrees above the pre-industrial average for 2100.
The IPCC states that, as the table above shows, All countries are expected to experience higher temperatures by the end of the century, But global warming will be more severe in some parts of the world. Thus, the economic impact of climate change will also vary, which will have a significant impact on the profitability of assets.
Specially, The Arctic region is expected to warm faster than the global average.. In addition, temperatures in the high latitudes of the Northern Hemisphere will rise faster than in the tropics.
Precipitation will also not be evenly distributed around the world.. It is expected to increase in high latitude regions and in the equatorial Pacific, areas already affected by the long monsoon season. It is likely to occur over mid-latitude sub-tropical regions, which tend towards dry areas.
it means that Wetlands of the world are expected to become wetter. As climate change intensifies, water is likely to become less available in areas where water supplies are already inadequate. for example, India, Pakistan and Nepal are likely to experience a more severe monsoon season. While countries in Africa and South America are likely to experience dry conditions.
impact of climate change on productivity
We have incorporated the economic impact of climate change into our long-term productivity projections. The methodology and implications for investors are explained in our 30-year profitability forecast.
As recent research by Burke and Tanutama points out, There is a quadratic relationship between productivity growth and temperature. This means that in “cold countries” productivity tends to increase as annual temperatures rise, but where annual temperatures are above 12–13 °C, productivity begins to decline.
For example, in cold countries Rise in temperature could open up new areas for development or make more parts of the ocean navigable And fishing is available when the ice melts. Conversely, in warm countries, agricultural production is expected to decline due to the intensity of desertification. Increasing heat pressure will also reduce animal production.
Figure 2 shows the material cost in a scenario where the global temperature is 2100 . rises up to more than 3 °C compared to the pre-industrial average. This scenario suggests that global economies are not implementing adequate mitigation strategies to limit carbon emissions.
are expressed in relation to the cost “No case of climate change”, where there is no temperature effect. Over the 30-year horizon, Switzerland, Canada, Germany, France and the United Kingdom would be better off in a scenario where global warming exceeds 3 °C above pre-industrial levels. Productivity is declining in Australia and most emerging countries.
The most obvious consequences of climate change
It is not only in the long run that climate change can cause economic damage. Extreme weather events suggest that there is a short-term effect as well. Hurricanes Harvey, Irma, Katrina and Sandy have already shown just how damaging climate change can be today. These are some of the most visible examples of the short-term consequences of a warmer world.
It is a well-known fact that global warming has led to a significant increase in climate-related events in recent decades. For example, globally, The average number of tropical cyclones has dropped from 14 to 23 in a decade since the early 1980s.While the number of floods has almost doubled. The IPCC emphasizes that the risks associated with extreme events will continue to increase and that these events will become more frequent and disruptive as temperatures rise.
Extreme weather events, as they are strictly dependent on changes in temperature and precipitation, will disproportionately affect different regions of the world. In recent decades there has been an increase in floods and tropical cyclones in some parts of the world. Graph 3 below shows the evolution of the average number of these events during the first decade of the 2000s compared to the 1980s. According to the IPCC analysis, it suggests that floods and tropical cyclones are more frequent in Southeast Asia.
These events can have disastrous and disastrous consequences for people. Data from the Internal Displacement Observatory highlights that Since 2008, nearly 200 million people have been forced to leave their homes, Due to floods and storms in about 98% of the cases.
More importantly, the data shows that people in some parts of the world have been affected more than others. Specially, Filipinos are most at risk, With the number of new displacements reaching 46% of the population since 2008. The rest of Southeast Asia and China have also been affected by the extreme weather conditions, but also the United States and Japan. People living in European countries and the UK were at the lowest risk of displacement due to extreme weather conditions.
Finally, it should be noted that the data refers to movements within the country, but we think it is reasonable to assume that internal migration is positively correlated with external migration. may suggest that As global warming intensifies and extreme weather conditions become more severe, We may see more people moving from high-risk areas, such as Asian countries, to safer parts of the world.
How much will it cost to investors?
Some literature on the economics of climate change suggests that natural disasters can actually boost business productivity and promote long-term growth. Indeed, companies that survive disasters will improve their social capital and adopt new technologies. The notion that disasters encourage development is called “constructive destruction”.
However, not everything supports this view. A recent study analyzed the physical exposure of countries to a universe of tropical cyclones during the period 1950–2008. she got There is strong evidence that national income tends to decline compared to the pre-disaster trend, and does not recover for 20 years. This appears to be explained by the fact that disasters temporarily slow growth by destroying capital, but there is no rebound because the various clawback mechanisms do not compensate for the negative short-term impact of the loss of capital.
analysis seems to confirm that The “no recovery” hypothesis, finding that a one-year standard deviation of cyclone risk reduces GDP by 3.6 percentage points after 20 years, putting the average country down in about two years of growth.
In our 30-year yield analysis, we incorporated the impact of global warming on productivity to determine whether This will have an impact on the profitability of equities in the long run. In the long run, productivity is an important factor in return on equity. Consequently, the profitability of works will be affected by climate change through their impact on productivity.
Chart 6 compares our 30-year stock returns with and without global warming. It is clear that there will be winners and losers due to rising temperatures.
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