Climate Risk And Response - McKinsey & Company

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Executive summaryClimate riskand responsePhysical hazards and socioeconomic impactsJanuary 2020

McKinsey Global InstituteSince its founding in 1990, the McKinseyGlobal Institute (MGI) has sought todevelop a deeper understanding of theevolving global economy. As the businessand economics research arm of McKinsey& Company, MGI aims to provide leadersin the commercial, public, and socialsectors with the facts and insightson which to base management andpolicy decisions.MGI research combines the disciplines ofeconomics and management, employingthe analytical tools of economics withthe insights of business leaders. Our“micro-to-macro” methodology examinesmicroeconomic industry trends to betterunderstand the broad macroeconomicforces affecting business strategy andpublic policy. MGI’s in-depth reports havecovered more than 20 countries and30 industries. Current research focuseson six themes: productivity and growth,natural resources, labor markets, theevolution of global financial markets,the economic impact of technology andinnovation, and urbanization. Recentreports have assessed the digitaleconomy, the impact of AI and automationon employment, income inequality,the productivity puzzle, the economicbenefits of tackling gender inequality,a new era of global competition,Chinese innovation, and digital andfinancial globalization.MGI is led by three McKinsey & Companysenior partners: James Manyika,Sven Smit, and Jonathan Woetzel.James and Sven also serve as co-chairsof MGI. Michael Chui, Susan Lund,Anu Madgavkar, Jan Mischke,Sree Ramaswamy, Jaana Remes,Jeongmin Seong, and Tilman Tacke areMGI partners, and Mekala Krishnan is anMGI senior fellow.Project teams are led by the MGIpartners and a group of senior fellowsand include consultants from McKinseyoffices around the world. These teamsdraw on McKinsey’s global network ofpartners and industry and managementexperts. The MGI Council is madeup of leaders from McKinsey officesaround the world and the firm’s sectorpractices and includes Michael Birshan,Andrés Cadena, Sandrine Devillard,André Dua, Kweilin Ellingrud,Tarek Elmasry, Katy George, Rajat Gupta,Eric Hazan, Acha Leke, Gary Pinkus,Oliver Tonby, and Eckart Windhagen.The Council members help shape theresearch agenda, lead high-impactresearch and share the findings withdecision makers around the world. Inaddition, leading economists, includingNobel laureates, advise MGI research.The partners of McKinsey fund MGI’sresearch; it is not commissioned byany business, government, or otherinstitution. For further information aboutMGI and to download reports for free,please collaboration with McKinsey & Company's Sustainability and Global Risk practiciesMcKinsey & Company’s SustainabilityPractice helps businesses andgovernments reduce risk, managedisruption, and capture opportunitiesin the transition to a low-carbon,sustainable-growth economy. Clientsbenefit from our integrated, systemlevel perspective across industries fromenergy and transport to agriculture andconsumer goods and across businessfunctions from strategy and risk tooperations and digital technology. Ourproprietary research and tech-enabledtools provide the rigorous fact basethat business leaders and governmentpolicy makers need to act boldly withconfidence. The result: cutting-edgesolutions that drive business-modeladvances and enable lasting performanceimprovements for new players andincumbents & Company’s Global RiskPractice partners with clients to gobeyond managing risk to enhancingresilience and creating value.Organizations today face unprecedentedlevels and types of risk produced bya diversity of new sources. Theseinclude technological advancesbringing cybersecurity threats andrapidly evolving model and data risk;external shifts such as unpredictablegeopolitical environments and climatechange; and an evolving reputational risklandscape accelerated and amplified bysocial media. We apply deep technicalexpertise, extensive industry insights,and innovative analytical approaches tohelp organizations build risk capabilitiesand assets across a full range of riskareas. These include financial risk,capital and balance sheet–related risk,nonfinancial risks (including cyber, dataprivacy, conduct risk, and financial crime),compliance and controls, enterprise riskmanagement and risk culture, model riskmanagement, and crisis response andresiliency—with a center of excellence fortransforming risk management throughthe use of advanced

Climate riskand responsePhysical hazards and socioeconomic impactsJanuary 2020AuthorsJonathan Woetzel, ShanghaiDickon Pinner, San FranciscoHamid Samandari, New YorkHauke Engel, FrankfurtMekala Krishnan, BostonBrodie Boland, Washington, DCCarter Powis, Toronto

PrefaceMcKinsey has long focused on issues of environmental sustainability, dating to client studiesin the early 1970s. We developed our global greenhouse gas abatement cost curve in 2007,updated it in 2009, and have since conducted national abatement studies in countriesincluding Brazil, China, Germany, India, Russia, Sweden, the United Kingdom, and the UnitedStates. Recent publications include Shaping climate-resilient development: A framework fordecision-making (jointly released with the Economics of Climate Adaptation Working Groupin 2009), Towards the Circular Economy (joint publication with Ellen MacArthur Foundationin 2013), An integrated perspective on the future of mobility (2016), and Decarbonizationof industrial sectors: The next frontier (2018). The McKinsey Global Institute has likewisepublished reports on sustainability topics including Resource revolution: Meeting the world’senergy, materials, food, and water needs (2011) and Beyond the supercycle: How technologyis reshaping resources (2017).In this report, we look at the physical effects of our changing climate. We explore risks todayand over the next three decades and examine cases to understand the mechanisms throughwhich physical climate change leads to increased socioeconomic risk. We also estimate theprobabilities and magnitude of potential impacts. Our aim is to help inform decision makersaround the world so that they can better assess, adapt to, and mitigate the physical risks ofclimate change.This report is the product of a yearlong, cross-disciplinary research effort at McKinsey &Company, led by MGI together with McKinsey’s Sustainability Practice and McKinsey’s RiskPractice. The research was led by Jonathan Woetzel, an MGI director based in Shanghai, andMekala Krishnan, an MGI senior fellow in Boston, together with McKinsey senior partnersDickon Pinner in San Francisco and Hamid Samandari in New York, partner Hauke Engel inFrankfurt, and associate partner Brodie Boland in Washington, DC. The project team was ledby Tilman Melzer, Andrey Mironenko, and Claudia Kampel and consisted of Vassily Carantino,Peter Cooper, Peter De Ford, Jessica Dharmasiri, Jakob Graabak, Ulrike Grassinger, ZealanHoover, Sebastian Kahlert, Dhiraj Kumar, Hannah Murdoch, Karin Östgren, Jemima Peppel,Pauline Pfuderer, Carter Powis, Byron Ruby, Sarah Sargent, Erik Schilling, Anna Stanley,Marlies Vasmel, and Johanna von der Leyen. Brian Cooperman, Eduardo Doryan, Jose MariaQuiros, Vivien Singer, and Sulay Solis provided modeling, analytics, and data support. MichaelBirshan, David Fine, Lutz Goedde, Cindy Levy, James Manyika, Scott Nyquist, Vivek Pandit,Daniel Pacthod, Matt Rogers, Sven Smit, and Thomas Vahlenkamp provided critical input andconsiderable expertise.While McKinsey employs many scientists, including climate scientists, we are not a climateresearch institution. Woods Hole Research Center (WHRC) produced the scientificanalyses of physical climate hazards in this report. WHRC has been focused on climatescience research since 1985; its scientists are widely published in major scientific journals,testify to lawmakers around the world, and are regularly sourced in major media outlets.Methodological design and results were independently reviewed by senior scientists atthe University of Oxford’s Environmental Change Institute to ensure impartiality and testthe scientific foundation for the new analyses in this report. Final design choices andinterpretation of climate hazard results were made by WHRC. In addition, WHRC scientistsproduced maps and data visualization for the report.We would like to thank our academic advisers, who challenged our thinking and addednew insights: Dr. Richard N. Cooper, Maurits C. Boas Professor of International Economicsat Harvard University; Dr. Cameron Hepburn, director of the Economics of SustainabilityiiMcKinsey Global Institute

Programme and professor of environmental economics at the Smith School of Enterprise andthe Environment at Oxford University; and Hans-Helmut Kotz, Program Director, SAFE PolicyCenter, Goethe University Frankfurt, and Resident Fellow, Center for European Studies atHarvard University.We would like to thank our advisory council for sharing their profound knowledge andhelping to shape this report: Fu Chengyu, former chairman of Sinopec; John Haley, CEOof Willis Towers Watson; Xue Lan, former dean of the School of Public Policy at TsinghuaUniversity; Xu Lin, US China Green Energy Fund; and Tracy Wolstencroft, president and chiefexecutive officer of the National Geographic Society. We would also like to thank the Bankof England for discussions and in particular, Sarah Breeden, executive sponsor of the Bankof England’s climate risk work, for taking the time to provide feedback on this report as wellas Laurence Fink, chief executive officer of BlackRock, and Brian Deese, global head ofsustainable investing at BlackRock, for their valuable feedback.Our climate risk working group helped develop and guide our research over the yearand we would like to especially thank: Murray Birt, senior ESG strategist at DWS;Dr. Andrea Castanho, Woods Hole Research Center; Dr. Michael T. Coe, director of the TropicsProgram at Woods Hole Research Center; Rowan Douglas, head of the capital science andpolicy practice at Willis Towers Watson; Dr. Philip B. Duffy, president and executive directorof Woods Hole Research Center; Jonathon Gascoigne, director, risk analytics at Willis TowersWatson; Dr. Spencer Glendon, senior fellow at Woods Hole Research Center; Prasad Gunturi,executive vice president at Willis Re; Jeremy Oppenheim, senior managing partner atSYSTEMIQ; Carlos Sanchez, director, climate resilient finance at Willis Towers Watson;Dr. Christopher R. Schwalm, associate scientist and risk program director at Woods HoleResearch Center; Rich Sorkin, CEO at Jupiter Intelligence; and Dr. Zachary Zobel, projectscientist at Woods Hole Research Center.A number of organizations and individuals generously contributed their time, data, andexpertise. Organizations include AECOM, Arup, Asian Development Bank, Bristol City Council,CIMMYT (International Maize and Wheat Improvement Center), First Street Foundation,International Food Policy Research Institute, Jupiter Intelligence, KatRisk, SYSTEMIQ,Vietnam National University Ho Chi Minh City, Vrije Universiteit Amsterdam, Willis TowersWatson, and World Resources Institute. Individuals who guided us include Dr. Marco Albani ofthe World Economic Forum; Charles Andrews, senior climate expert at the Asian DevelopmentBank; Dr. Channing Arndt, director of the environment and production technology divisionat IFPRI; James Bainbridge, head of facility engineering and management at BBraun;Haydn Belfield, academic project manager at the Centre for the Study of Existential Riskat Cambridge University; Carter Brandon, senior fellow, Global Commission on Adaptationat the World Resources Institute; Dr. Daniel Burillo, utilities engineer at California EnergyCommission; Dr. Jeremy Carew-Reid, director general at ICEM; Dr. Amy Clement, Universityof Miami; Joyce Coffee, founder and president of Climate Resilience Consulting; Chris Corr,chair of the Florida Council of 100; Ann Cousins, head of the Bristol office’s Climate ChangeAdvisory Team at Arup; Kristina Dahl, senior climate scientist at the Union of ConcernedScientists; Dr. James Daniell, disaster risk consultant at CATDAT and Karlsruhe Instituteof Technology; Matthew Eby, founder and executive director at First Street Foundation;Jessica Elengical, ESG Strategy Lead at DWS; Greg Fiske, senior geospatial analyst atWoods Hole Research Center; Susan Gray, global head of sustainable finance, business,and innovation, S&P Global; Jesse Keenan, Harvard University Center for the Environment;Dr. Kindie Tesfaye Fantaye, CIMMYT (International Maize and Wheat Improvement Center);Dr. Xiang Gao, principal research scientist at Massachusetts Institute of Technology;Beth Gibbons, executive director of the American Society of Adaptation Professionals; SirCharles Godfray, professor at Oxford University; Patrick Goodey, head of flood managementin the Bristol City Council; Dr. Luke J. Harrington, Environmental Change Institute at Universityof Oxford; Dr. George Havenith, professor of environmental physiology and ergonomics atLoughborough University; Brian Holtemeyer, research analyst at IFPRI; David Hodson, seniorscientist at CIMMYT; Alex Jennings-Howe, flood risk modeller in the Bristol City Council;Climate risk and response: Physical hazards and socioeconomic impactsiii

Dr. Matthew Kahn, director of the 21st Century Cities Initiative at Johns Hopkins University; Dr.Benjamin Kirtman, director of the Cooperative Institute for Marine and Atmospheric Studiesand director of the Center for Computational Science Climate and Environmental HazardsProgram at the University of Miami; Nisha Krishnan, climate finance associate at the WorldResources Institute, Dr. Michael Lacour-Little, director of economics at Fannie Mae; Dr.Judith Ledlee, project engineer at Black & Veatch; Dag Lohmann, chief executive officer atKatRisk; Ryan Lewis, profe