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Climate change remains single biggest global economic threat

Top insurers and economists warn climate change remains biggest global economic threat, despite ongoing COVID risks.

Hurricane Ida

Double exposure of Hurricane Ida approaching New Orleans on Aug. 29. Image courtesy of Brian McGowan

Climate change risks continue to dominate the global economic threat register even as the COVID-19 pandemic enters its third year, with fresh estimates suggesting the overall bill for last year's natural disasters and weather-related catastrophes hit $280 billion worldwide.

In the latest annual risk assessment published by the World Economic Forum (WEF) this week, climate change and extreme weather feature heavily in the top threats to the global economy in the short, medium and long-term, while there are also growing concerns over the threat to livelihoods, mental health and social cohesion in the wake of the COVID-19 crisis.

However, despite the ongoing nature of the coronavirus pandemic and the continued threat from new variants, extreme weather is still listed as the greatest single threat facing the global economy over the next two years, with the failure of climate action sitting in third place. For the medium-term outlook over the the next five years, climate action failure climbs to top spot in the list of economic threats, just ahead of extreme weather.

In addition, climate and environmental threats loom large over WEF's long-term risk outlook, with climate action failure, extreme weather, biodiversity loss, natural resource crises and human environmental damage making up the entire list of the top five risks facing the global economy over the next decade.

As companies recover from the pandemic, they are rightly sharpening their focus on organizational resilience and ESG credentials.

Commenting on WEF's findings, Peter Giger, group chief risk officer at Zurich Insurance Group, emphasized that the climate crisis "remains the biggest long-term threat facing humanity," and called for renewed action to decarbonize the global economy in line with the goals of the Paris Agreement.

"Failure to act on climate change could shrink global GDP by one-sixth and the commitments taken at COP26 are still not enough to achieve the 1.5 [degrees Celsius] goal," he warned. "It is not too late for governments and businesses to act on the risks they face and to drive an innovative, determined and inclusive transition that protects economies and people."

WEF's latest assessment comes as the COVID-19 pandemic, which first emerged in China in late 2019, enters its third year, with the Omicron variant and public health concerns continuing to cause major disruption to the global economy. WEF's annual Davos Summit this month has once again been forced online and governments around the world are wrestling with how to manage pressure on health systems, minimize the risk of dangerous new variants and imropve access to vaccines, while returning their economies to a degree of normality.

Meanwhile, the global gas crisis — which has initially sparked by the restart of economic activity following the first wave of the pandemic — continues to push up energy prices, with WEF warning that the global recovery from COVID-19 would likely prove highly volatile and uneven over the next three years.

As a result, the new global risk assessment also highlights significant social threats to economic stability in 2022 and beyond, pointing in particular to the risks of livelihood crises, the erosion of social cohesion, further infectious disease threats, debt crises and mental health deterioration.

Carolina Klint, risk management leader for continental Europe at insurance broker Marsh, said the combination of major, interlinked environmental and social risks underscored the importance of companies bolstering their environmental, social and governance (ESG) strategies so as to bolster their resilience and tap into new market opportunities. "As companies recover from the pandemic, they are rightly sharpening their focus on organizational resilience and ESG credentials," she said.

The latest warnings come in WEF's 17th annual assessment of the greatest threats facing the global economy, which has increasingly seen climate and environmental concerns dominate the concerns of leading economists and business leaders as the impacts from a warming planet have intensified.

The Global Risks Report 2022 was compiled by WEF in collaboration with its strategic partners Marsh McLennan, SK Group and Zurich Insurance Group, as well as advisers at the University of Oxford, the National University of Singapore and the University of Pennsylvania.

It follows a raft of major natural disasters and extreme weather events last year that killed almost 10,000 people in total, such as Hurricane Ida in the U.S., flash floods and extreme rainfall across central Europe, as well as wildfires that once again raged across Europe, North and South America, Asia and Australia. Scientists this week concluded 2021 was one of the hottest years on record, with the last seven years the hottest seven year period in recorded history.

As a result, insurance giant Munich Re said 2021 proved to be the second-costliest for the global insurance sector, with natural disasters driving overall losses of $280 billion worldwide, of which just $120 billion was insured, according to its latest annual disaster losses report.

Although 2017 remains the costliest year on record, natural disasters in 2021 caused substantially higher losses than the previous two years, with well under half of these losses still uninsured.

Hurricane Ida, which ravaged parts of the U.S. south last year, proved to be the world's costliest natural disaster in 2021, driving overall losses of $65 billion alone, while flash floods in Europe drove losses of $54 billion, with Germany in particular among the hardest hit, according to Munich Re.

Many of last year's weather catastrophes fit in with the expected consequences of climate change, the insurance giant said.

Two people escape during flash flood in Malaysia

Flood victims in Taman Sri Muda in Malaysia. Image via Shutterstock/Izwan Is

Munich Re board member Torsten Jeworrek, CEO of its reinsurance arm, stressed that greater loss preparedness and climate protection should therefore be a matter of urgency for the global economy.

"The images of natural disasters in 2021 are disturbing," he said. "Climate research increasingly confirms that extreme weather has become more likely. Societies need to urgently adapt to increasing weather risks and make climate protection a priority. Insurers meet their responsibilities by covering a portion of the risks and losses. By applying risk-adequate premiums, they put a price on natural hazards, thereby encouraging carefully considered behavior to limit the losses."

But Ernst Rauch, chief climate and geo scientist at Munich Re, who also heads up the firm's Climate Solutions Unit, warned that adapting to increasing climate risks would be "a challenge."

"The 2021 disaster statistics are striking because some of the extreme weather events are of the kind that are likely to become more frequent or more severe as a result of climate change," he added. "Even though events cannot automatically be attributed to climate change, analysis of the changes over decades provides plausible indications of a connection with the warming of the atmosphere and the oceans."

Climate research increasingly confirms that extreme weather has become more likely. Societies need to urgently adapt to increasing weather risks and make climate protection a priority.

With the world's biggest economy, the USA, suffering the highest losses from natural disasters and weather events last year, the latest data suggests the impacts of climate change can prove a threat to richer countries and poorer nations alike.

That much is underscored by fresh data this week from U.S. federal agency the National Oceanic and Atmospheric Administration (NOAA), which in its own assessment found that 688 people were killed in 20 major weather and climate disasters in the country last year.

In total, these events — which include droughts, floods, hurricanes, wildfires and winter storms — cost the U.S. a total of $145 billion, with each disaster on its own costing more than $1 billion, NOAA said.

From floods to wildfires, unexpected freezing temperatures, droughts and heatwaves and even hurricanes, the growing physical threats posed by natural disasters to lives, livelihoods and economies lay bare the eye watering costs posed by events that are likely to intensify in the coming years due to climate change.

The data and risk warnings issued this week by leading economists and insurers should, once again, send alarm bells ringing in government offices and boardrooms worldwide, particularly given the seven warmest years on record all occurred in the past seven years.

Only through deep decarbonization to halve global emissions by 2030 can the world stand a chance of stopping these threats worsening. Yet despite the glaring evidence, growing warnings, and renewed commitments from global governments and businesses made at the COP26 Climate Summit just two months ago, the world remains a long way from delivering on its climate pledges.

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