Climate risk

Climate risk refers to risks resulting from the effects of global warming.[1] The study of climate risk includes developing risk assessment and risk management strategies appropriate to global warming.

In the course of increasing global temperature and extreme weather phenomena the Intergovernmental Panel on Climate Change (IPCC) was created by the United Nations Environment Programme (UNEP) and the World Meteorological Organization (WMO) for a better understanding of climate change. Its main aim is evaluating climate risks and exploring strategies for their prevention.

Climate risks

According to the IPCC Fifth Assessment Report: "Impacts from recent climate-related extremes, such as heat waves, droughts, floods, cyclones, and wildfires, reveal significant vulnerability and exposure of some ecosystems and many human systems to current climate variability".[2]

The following future impacts can be expected:

While affecting all economic sectors, effects on single continents will vary. Beside these direct physical climate risks there are also indirect risks:

  • Physical risks: Direct risks of climate change negatively impact agriculture, fisheries, forestry, health care, real estate and tourism. For example, storms and flooding damages buildings and infrastructure, and droughts lead to crop failure.
  • Regulational risks: Governmental endeavours to reduce climate costs have direct effects on the economy. For example, Kyoto-Protocol emissions targets could be realised by implementing emissions trading, requiring the cost of emissions to be quantified monetarily. These costs would be used by companies to evaluate investment decisions. Factoring in emissions costs will cause prices to rise therefore impacting consumer demand. The insecurity of legislation leads to indefinite postponement of projects and investments.
  • Litigational risks: Similar to the tobacco industry, industries producing excessive greenhouse gases (GHG) are exposed to the risk of an increasing number of lawsuits if damages can be correlated to emissions.[3]
  • Competitive risks: If companies do not take measures to reduce climate risks they are competitively disadvantaged. This might lead to increasing production costs caused by obsolete technologies and therefore to decreasing profits.
  • Production risks: Production shortfalls can result from direct or indirect climate risks, i.e., hurricanes damaging oil production facilities can lead to supply disruption and increased prices. Also the price for energy will rise, as heatwaves cause water scarcity, impacting the supply of power plant cooling water.
  • Reputational risks: Companies publicly criticized for their environmental policies or high emissions might lose customers because of negative reputation.[4]
  • Financial risks[5]


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