Climate change encompasses a spectrum of alterations in Earth's climate patterns over extended periods, primarily caused by human-induced activities. These include the release of greenhouse gases from burning fossil fuels, deforestation, industrial processes, and agricultural practices. These activities result in a gradual but persistent change in global and regional climates, leading to disruptions in weather patterns, shifts in temperature and precipitation, and an increase in the frequency and intensity of extreme weather events.
Significant reductions in greenhouse gas (GHG) emissions offer a promising pathway to limit the global annual average temperature rise to 2°C or less. Conversely, without substantial cuts in these emissions, the annual global temperature average might surge by 5°C or more compared to preindustrial levels, potentially occurring by the century's end.
Global warming refers specifically to the long-term increase in Earth's average surface temperature due to the accumulation of greenhouse gases in the atmosphere. These gases, such as carbon dioxide and methane, trap heat, creating a greenhouse effect that leads to a rise in temperatures worldwide. The warming trend poses risks to ecosystems, weather patterns, sea levels, and human health, impacting various sectors and economic activities.
The consequences of climate change are multifaceted, impacting diverse aspects of life and the economy. First we look at the natural consequences and then at the social consequences of climate change.
Manifest in more frequent and severe weather events, including hurricanes, droughts, wildfires, and floods, disrupting ecosystems and economies.
The climate crisis has elevated the average global temperature, resulting in more frequent occurrences of extreme heat, like heatwaves. These heightened temperatures pose risks such as elevated mortality rates, diminished productivity, and infrastructure damage. Particularly vulnerable segments of the population, such as the elderly and infants, face the most severe impacts.
Owing to the shifting climate patterns, numerous European areas are experiencing heightened occurrences of more severe and prolonged droughts. Droughts, characterized by a temporary shortage of water, arise from a blend of reduced precipitation and amplified evaporation due to rising temperatures. It's important to differentiate droughts from water scarcity, the latter being a chronic shortage of fresh water stemming from excessive consumption throughout the year.
As global temperatures rise, alterations in rainfall patterns, heightened evaporation, glacier melting, and rising sea levels collectively impact the accessibility of fresh water. Anticipated consequences include more frequent and severe droughts, coupled with elevated water temperatures, contributing to a decline in water quality. These environmental shifts foster the proliferation of toxic algae and bacteria, exacerbating the pre-existing challenge of water scarcity primarily induced by human activities.
Anticipated climate change projections suggest heightened precipitation in numerous regions. Prolonged increased rainfall is likely to result in river flooding (fluvial flooding), while brief but intense cloudbursts may induce pluvial floods. In pluvial flooding, extreme rainfall leads to flooding without the overflow of any existing body of water.
Throughout the 20th century, there has been an increase in sea levels, a trend that has accelerated in recent decades. This rise is primarily attributed to the thermal expansion of the oceans caused by warming. Additionally, the contribution of melting ice from glaciers and the Antarctic ice sheet is notable. Projections indicate that by the end of the century, Europe may face an average sea-level rise of 60 to 80 cm, contingent largely on the rate at which the Antarctic ice sheet undergoes melting.
The rapid pace of climate change has placed numerous plant and animal species under strain, challenging their ability to adapt. Clear evidence indicates that biodiversity is actively responding and will persist in doing so. These responses encompass alterations in phenology (behavior and lifecycles of flora and fauna), shifts in species abundance and distribution, modifications in community makeup, adjustments to habitat structure, and changes in ecosystem functions and processes.
Climate change has the potential to exacerbate several soil-related challenges, including erosion, reduced organic matter, salinization, loss of soil biodiversity, landslides, desertification, and flooding. The impact of climate change on soil carbon storage is linked to shifts in atmospheric CO2 levels, rising temperatures, and alterations in precipitation patterns. Climate-related occurrences such as intense precipitation, rapid snow or ice melting, elevated river discharges, and intensified droughts significantly contribute to soil degradation. Furthermore, human-induced activities like deforestation, agriculture, and recreational pursuits like skiing also contribute to these concerns.
The consequences of climate change, including rising sea surface temperatures, ocean acidification, and shifts in currents and wind patterns, will profoundly transform both the physical and biological aspects of the oceans. Alterations in temperature and ocean circulation hold the potential to shift the geographical distribution of marine fish.
Present risks to human health, livelihoods, and societal well-being through increased disease prevalence, food insecurity, migration, and conflicts over scarce resources.
Climate change poses a considerable threat not only to human health but also to the well-being of animals and plants. Although a changing climate might not introduce many new or unknown health threats, it will intensify and accentuate the existing effects, surpassing the current observed impacts.
Climate change has triggered the transformation of once-habitable environments into increasingly inhospitable habitats. Rising temperatures, shifts in precipitation patterns, and extreme weather events have significantly altered ecosystems, rendering some regions unsuitable for sustaining life as they once did. From increased desertification and rising sea levels to frequent wildfires and diminishing freshwater sources, these changes have culminated in habitats becoming uninhabitable for many species, leading to the loss of biodiversity and threatening the delicate balance of ecosystems. Such alterations force species to adapt, migrate, or face the grim reality of vanishing from their native habitats.
Temperature rises, shifts in precipitation patterns, and rising sea levels will directly or indirectly influence the productivity and sustainability of economic sectors across all EU Member States, carrying implications for the labor market. The impacts of climate change extend to workforce availability, potentially stemming from diminished population health conditions and heightened occupational constraints. These constraints encompass elevated workplace temperatures and more frequent, intense natural hazards, which may hinder individuals from accessing their workplaces.
Climate change translates into substantial financial implications, impacting various aspects of the financial world, let’s break it down:
Climate-related shocks possess the capacity to disrupt the stability of financial markets, jeopardize asset values, and imperil the robustness of financial institutions. These shocks stem from the unpredictability and severity of climate-related events, causing substantial disruptions in market dynamics, investor confidence, and overall economic stability. Instances like extreme weather events, wildfires, or sea-level rise can trigger widespread financial instability, leading to market volatility and potential economic downturns.
The impact of climate change on asset valuation spans physical risks, including property damage incurred from intensified weather events, and transition risks associated with policy alterations influencing carbon-intensive industries. Physical risks manifest in tangible damages to assets, infrastructure, and property due to climate-induced disasters, leading to reevaluation and potentially diminished asset values. Transition risks encompass changes in government policies, technological advancements, or market shifts that impact the future profitability and viability of certain assets, particularly those dependent on high-carbon practices.
Climate change introduces a new spectrum of risks that necessitate integration into conventional financial risk management strategies. This entails a comprehensive reevaluation of risk models and management approaches to account for the evolving landscape of climate-related risks. Risk managers need to incorporate climate-related considerations into their methodologies, including factors like the probability and potential impact of extreme weather events, regulatory changes, and shifts in consumer preferences, to adequately assess and mitigate emerging risks.
The transition toward a low-carbon economy is poised to challenge the viability of certain assets, rendering them obsolete or less valuable, particularly those reliant on high-carbon practices. As industries and economies pivot towards sustainability and greener initiatives, assets linked to fossil fuels or carbon-intensive sectors may face diminished demand and profitability. This shift in market preferences and regulatory frameworks may leave assets previously considered valuable or profitable at risk of depreciation or becoming stranded assets, impacting investor portfolios and financial stability.
Addressing climate risk as an asset manager, bank or investment company in general necessitates a multi-faceted approach involving:
Climate data includes insights from diverse external sources, shedding light on climate impact and climate change. Here some important climate data types, most of which we also offer at Bavest:
Are you an asset manager or fintech seeking to leverage cutting-edge climate data and analytics? By integrating climate considerations into your investment frameworks, risk management practices, and reporting standards, you not only safeguard financial interests but also contribute to global sustainability. Connect with us to explore how we can support your initiatives!
