In many conversations, climate change gets boiled down to individual events, or even just the simple sum of multiple events. But the impacts this summer offer a useful reminder that it’s not so simple. While economies may be able to absorb one climate shock, the risks grow when they accumulate and occur across geographies and assets simultaneously. You might call it “death by a thousand cuts.”
But insurance is not alone. We’re starting to see indicators of other, similar slow-moving financial disasters. Earlier this month, the Bank of England quietly said that climate change was creating a spending pressure on governments, contributing to growing sovereign debt loads. Last month, the International Monetary Fund warned that climate disasters were creating an “impossible trilemma” for countries. Disasters drive countries to take on more debt, making it harder to fund the adaptation necessary to prepare, and then face higher default risk.
Thus far, capital markets more broadly have been slow to respond to this threat for a variety of reasons. Climate risk is difficult to model and plays out over long time-periods. Meanwhile, investors discount future risks and prioritize quick returns. And, importantly, they generally expect that events will be non-correlated and therefore easier to absorb.
For many who work in climate, this season of extremes has revived the longstanding prediction that the effects of rising global temperatures will help drive a resurgence in concern among policymakers and the general public. I hope so, but I’m not so sure. While some studies have suggested extreme weather events can drive support for climate action, many others have shown minimal effect. And we’ve also seen the opposite effect: climate events that triggered populist backlash led by anti-climate politicians.
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