An effective response stability. We are not accustomed to planning for Local climate threats are increasing in most of a world with a changing climate. For example, the world. The changing environment is steadily statistical risk management is often not part of ordi- altering the very nature of regions around the nary processes in industrial companies. With the world. At the same time, the likelihood of “long tail” changing climate, it will be important to understand climate events that create cascading systemic and embrace the probabilistic nature of climate risk risk is growing. Physical climate risk will affect and be mindful of possible biases and outdated everyone, directly or indirectly. mental models; experiences and heuristics of the past may no longer be a reliable guide to the future. We think there are three steps that stakeholders The systemic nature of climate risk requires a holistic could consider as they seek an effective response approach to understand and identify the full range to the socioeconomic impacts of physical climate of possible direct and indirect impacts. risk: integrating climate risk into decision making, accelerating the pace and scale of adaptation, One of the biggest challenges from climate risk will and decarbonizing at scale to prevent a further be rethinking the current models we use to quantify buildup of risk. risk. These range from financial models used to make capital-allocation decisions to engineering Integrate climate risk into decision making models used to design structures. There is some Climate change needs to become a major feature in uncertainty associated with a methodology that corporate and public-sector decision making. As we leverages global and regional climate models, have noted, physical climate risk is simultaneously makes underlying assumptions on emission paths, spatial and systemic, nonstationary, and nonlinear and seeks to translate climate hazards to potential in its effect. Potential impacts are regressive and physical and financial damage. But exploring new rising over time, and stakeholders today may be ways to quantify climate risk is not the highest underprepared to manage them. Decision making “model risk.” Continued reliance on current models will need to reflect these characteristics. based on stable historical climate and economic data may be even riskier. For companies, this will mean taking climate considerations into account when looking Indeed, current models have at least three potential at capital allocation, development of products or flaws. First, they lack geographic granularity, at services, and supply-chain management, a time when companies need to know how their for example. Large capital projects would be key locations—and those of their suppliers—are evaluated in a way that reflects the increased exposed to different forms of climate threat. Second, probability of climate hazards at their location: How they don’t consider that the climate is constantly will that probability change over time? What are changing, a critical factor in determining such the possible changes in cost of capital for exposed things as how resilient to make new factories, what assets? How will climate risk affect the broader tolerance levels to employ in new infrastructure, market context and other implicit assumptions in and how to design urban areas. And third, they are the investment case? Cities will have to ask similar subject to potential sample bias, since decision questions for urban-planning decisions. Moreover, makers are accustomed to trusting their own while the MGI report focuses on physical risk, a experience as they make decisions about the future. comprehensive risk-management strategy will also need to include an assessment of transition and Accelerate the pace and scale of adaptation liability risk, as well as the interplay between these The pace and scale of adaptation will likely need to forms of risk. increase significantly. But adaptation is challenging. With hazard intensity projected to Changes in mindset, operating model, and tools increase, the economics of adaptation could worsen and processes will be needed to integrate climate over time. Technical limits may crop up. Difficult risk into decision making. For centuries, we have trade-offs may need to be assessed, including who made decisions based on a world of relative climate and what to protect and who and what to relocate. Confronting climate risk 103