Climate risk and response

Physical hazards and socioeconomic impacts
Climate change Climate change adaptation Economic forecasting Global environmental change

McKinsey has a long history of research on topics related to the economics of climate change. Over the past decade, we have published a variety of research including a cost curve illustrating feasible approaches to abatement and reports on understanding the economics of adaptation and identifying the potential to improve resource productivity. This research builds on that work and focuses on understanding the nature and implications of physical climate risk in the next three decades.

We draw on climate model forecasts to showcase how the climate has changed and could continue to change, how a changing climate creates new risks and uncertainties, and what steps can be taken to best manage them. Climate impact research makes extensive use of scenarios. Four “Representative Concentration Pathways“ (RCPs) act as standardized inputs to climate models. They outline different atmospheric greenhouse gas concentration trajectories between 2005 and 2100. During their inception, RCPs were designed to collectively sample the range of then-probable future emission pathways, ranging from lower (RCP2.6) to higher (RCP 8.5) CO2 concentrations. Each RCP was created by an independent modeling team and there is no consistent design of the socio-economic parameter assumptions used in the derivation of the RCPs. By 2100, the four RCPs lead to very different levels of warming, but the divergence is moderate out to 2050 and small to 2030.  Since the research in this report is most concerned with understanding inherent physical risks, we have chosen to focus on the higher-emission scenario, i.e. RCP 8.5, because of the higheremissions, lower-mitigation scenario it portrays, in order to assess physical risk in absence of further decarbonization (Exhibit E1).

We focus 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. Physical risk is the fundamental driver of other climate risk types— transition risk and liability risk. We do not focus on transition risks, that is, impacts from decarbonization, or liability risks associated with climate change. While an understanding of decarbonization and the risk and opportunities it creates is a critical topic, this report contributes by exploring the nature and costs of ongoing climate change in the next one to three decades in the absence of decarbonization.

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