About the research need to adjust assumptions about long-term mortgages. This article was adapted from the McKinsey Global Institute — Nonlinear. Physiological, human-made, and (MGI) report Climate risk and response: Physical hazards and ecological systems have evolved or been 1 socioeconomic impacts. Its authors are Jonathan Woetzel (a optimized over time to withstand certain director of MGI and a senior partner in McKinsey’s Shanghai office), thresholds. Those thresholds are now Dickon Pinner (senior partner in the San Francisco office and global being threatened. If or when they are breached, leader of McKinsey’s Sustainability Practice), Hamid Samandari the impact won’t be incremental—the systems (senior partner in the New York office and chair of McKinsey’s may falter, break down, or stop working knowledge council), Hauke Engel (partner in the Frankfurt office), altogether. Buildings designed to withstand Mekala Krishnan (senior fellow at MGI), Brodie Boland (associate floods of a certain depth won’t withstand partner in the Washington, DC, office), and Carter Powis (consultant floods of greater depths; crops grown for a mild in the Toronto office). climate will wither at higher temperatures. Some The 131-page MGI report, released in January 2020, measures the adaptation can be carried out fairly quickly (for impact of climate change based on the extent to which it could affect example, better preparing a factory for a flood). human beings, human-made physical assets, and the natural world. But natural systems such as crops may not Most of the climatological analysis performed for the report was be able to keep pace with the current rate of completed by the Woods Hole Research Center. There are a range temperature increase. The challenge becomes of estimates for the pace of global warming; we have chosen the even greater when multiple risk factors are Representative Concentration Pathway (RCP) 8.5 scenario because it present in a single region. enables us to assess physical risk in the absence of further — Systemic. Climate change can have knock-on decarbonization. Action to reduce emissions could delay projected effects across regions and sectors, through outcomes. Download the full report on McKinsey.com. interconnected socioeconomic and financial systems. For example, flooding in 1 See “Climate risk and response: Physical hazards and socioeconomic impacts,” McKinsey Global Florida might not only damage housing but also Institute, January 2020, McKinsey.com. raise insurance costs, lower property values, and reduce property-tax revenues. Supply chains are particularly vulnerable systems, since they prize efficiency over resilience. They might quickly grind to a halt if critical production hubs are affected by intensifying hazards. — Spatial. Climate hazards manifest locally. There are significant variations between countries — Regressive. The poorest communities and and even within countries. The direct effects of populations of the world are the most vulnerable. physical climate risk must be understood in the Emerging economies face the biggest increase context of a geographically defined area. in potential impact on workability and livability. The poorest countries often rely on outdoor work — Nonstationary. For centuries, financial markets, and natural capital, and they lack the financial companies, governments, and individuals means to adapt quickly. have made decisions against the backdrop of a stable climate. But the coming physical — Unprepared. Our society hasn’t confronted climate risk is ever-changing and nonstationary. a threat like climate change, and we are Replacing a stable environment with one of unprepared. While companies and communities constant change means that decision making are already adapting, the pace and scale of based on experience may prove unreliable. adaptation must accelerate. This acceleration For example, long-accepted engineering may well entail rising costs and tough choices, parameters for infrastructure design may need as well as coordinated action across multiple to be rethought; homeowners and banks may stakeholders. Confronting climate risk 97