There is so much more to climate change than meets the eye. Everyone can see its obvious effects - increasing average temperatures, extreme precipitation as well as the rising frequency of severe hurricanes and drought. However, the socioeconomic impacts of climate change on physiological, human-made and ecological systems are seldom discussed or even thought about.
These impacts are likely to be non-linear as systems are not able to tolerate climate change after a certain threshold and have knock-on effects, according to a report titled ‘Climate risk and response: Physical hazards and socioeconomic impacts’ published by McKinsey Global Institute in collaboration with McKinsey & Company's sustainability and global risk practices.
Impact on GDP
A worrying knock-on effect would be the possible decline in outdoor labour productivity and the effective number of hours that can be worked outdoors as temperatures rise and heatwaves become more frequent. After all, the human body functions at a stable core temperature of about 37 degrees Celsius, above which physical and mental functioning could be fatally impaired.
McKinsey estimates that this effect could place 2.5% to 4.5% of India’s GDP at risk annually by 2030 as the average number of lost daylight working hours continues to rise.
As of 2017, heat-exposed work produces about 50% of the country’s GDP, drives about 30% of GDP growth, and employs about 75% of the labour force.
In this scenario, climate change can indirectly affect GDP and the economy in a substantial manner.
Impact on infrastructure services
Another example given in the report is how the knock-on costs of constant monsoonal and storm surge flooding in Vietnam’s Ho Chi Minh City is estimated to rise from $100m to $400m today to between $1.5bn and as much as $8.5bn in 2050.
McKinsey predicts that at least $20bn of new infrastructure assets are currently planned for construction by 2050 in the city with many of them particularly the local metro system designed to tolerate an increase in flooding.
However, in a worst-case scenario such as a sea-level rise of 180 centimetres, these thresholds could be breached in many locations leading to a full metro closure, large sewage overflows, risk of full blackout and possible disruption of water supply.
Meanwhile, other knock-on effects that are taking place across regions are power outrages due to increased heat in an electrical grid and lesser food supplies as a result of higher temperatures reducing the reproductive growth rate of crops.
The role of insurance
To reduce knock-on effects, insurance can be utilised by societies as a crucial shock absorber. It will enable regions affected by climate change to recover more quickly from disasters, said the McKinsey report.
Insurance was also noted to be a tool to reduce exposure by transferring risk and drive resilience.
For example, crop insurance allows transferring the risk of yield failure due to drought and enables investments in irrigation and crop-management systems for rural populations who would otherwise be unable to afford this.
However, as the climate changes, the report suggests that insurance might need to be further adapted to continue providing resilience and, in some cases, avoid potentially adding vulnerability to the system.
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