This summer, the long awaited report of the Intergovernmental Panel on Climate Change (IPCC) has been published. While its conclusions are not new, it stresses the urgency of rapid decarbonization towards Net Zero in order to avoid increasing extreme weather events, such as hot extremes, marine heatwaves, and very heavy precipitation, agricultural and ecological droughts, and more intense tropical cyclones. The IPCC report also brought international attention to the danger of irreversible climate ‘tipping points’, such as permafrost thaw or ice sheet loss, which would push global temperatures to a point of no return.

Without rapid and drastic decarbonization supported by regulations and innovation, we could already reach 1.5°C in the next decade instead of the end of the century.

The IPCC report contains a number of highly relevant insights for climate risk managers, especially on the importance of climate extremes and tipping points in analyses of future risk:

1. Increasing climate extremes

From the record-breaking heat waves in Canada and Siberia, to the catastrophic flooding in Europe and China, extreme weather events have dominated the headlines in 2021. IPCC’s 2018 special report on 1.5⁰C of warming already indicated that “even relatively small incremental increases in global warming (+0.5C) cause statistically significant changes in extremes on the global scale and for large regions”. Many changes in the climate system become larger in direct relation to increasing global warming. Its latest report even contains a full chapter dedicated to assessing changes in climate extremes. So what can we expect?

The report demonstrates that businesses need to be prepared for more extreme events. Especially heat waves are expected to increase, disrupting infrastructure, causing agricultural losses and affecting workforce productivity. The ILO expects that by 2030, 80 million full-time jobs will be lost due to heat stress. Events like the heatwave that disrupted Canada in the summer of 2021 or hurricane Katrina in 2005 which resulted in the death of 1,833 people and caused damages of 178.8 billion USD will become increasingly likely as the global temperature rises. 

What does this mean for companies?
  • Assess the risk of climate extremes: extreme climate events are location specific. Companies should identify key regions in their value chain where climate extremes may occur and how these may affect their operations.
  • Identify future scenarios and mitigation strategies using scenario analysis: Scenario analysis provides a structured method to identify a range of potential long-term futures allowing companies to understand the climate-related risks relevant to their business and how these may evolve over time. Refer to our paper Looking Forward to a Rising Temperature: Practical Insights for Climate Risk Scenario Analysis for tips on this process.
     
Projected changes in frequency of extreme weather events (10-year events)

2. Tipping points: sudden and abrupt changes in the climate system

Tipping points are thresholds that, when surpassed, push a system into a completely new state. In terms of climate, large-scale events, such as the Amazon drying out, ocean currents (AMOC) suddenly stopping or the West-Antarctic or the Greenland ice sheet disintegrating, might push the planet outside a “safe operating space for humanity.”

The IPCC report notes that abrupt responses and tipping points in the climate system “cannot be ruled out”.

There are many tipping points identified, but two key examples are:

  • Deforestation and drying of the Amazon Rainforest: High temperatures and deforestation will ultimately dry out the Amazon rainforest. Once the rainforest is no longer able to support itself, its tipping point is reached. Beyond this point, the forest will transition to a drier ecosystem dominated by open grasslands with few trees. This would trigger major disruptions in the water cycle around the world, heavily impacting agricultural productivity and local communities. For the first time in its history, the Amazon now emits more carbon than it absorbs.
  • Weakening or collapse of the Atlantic Meridional Overturning Circulation: the Atlantic Meridional Overturning Circulation (AMOC) is a system of currents in the Atlantic Ocean that brings warm water up to Europe from the tropics and beyond. The AMOC will very likely strongly decline over the 21st century. AMOC declines could lead to world-wide changes in weather: widespread cooling throughout the North Atlantic and northern hemisphere; less precipitation in the northern hemisphere midlatitudes; and a strengthening of the North Atlantic storm track. The AMOC will very likely strongly decline over the 21st century; a recent study in Nature concludes that we are already at a point close to a critical transition.
     

So why should companies care about these tipping points?

  • Tipping points have a dramatic impact on nature and societies, but the probability of occurrence in the next decades is low. To keep the planet in a relatively healthy state for human and economic development, it is key to steer businesses towards net zero before 2050.
  • Your value chain likely has activities in areas that will be affected by tipping points, it could be beneficial to consider these tipping points as long-term black swan events in climate risk assessments.

Ultimately, climate extremes and tipping points point to a fundamental question: how prepared are companies to manage climate-related risks? While these types of events are not common at a global scale (yet), the damage inflicted can be incredibly high, if not much higher than the damage inflicted by a high probability event in any given year. In traditional risk management, companies and organizations are hardwired to restrict their thinking to what is known, not to the ‘impossible’, massively impactful events, for which they are truly vulnerable. Scenario analyses on climate risk can be used to identify these black swans and spot sources of risk and opportunity that would normally go undetected. Scenario analysis on climate risk is no longer simply a strategic asset, it is a risk management must.

Contact

If you are looking to assess climate risk and understand the strategic implications for your business, please contact Michiel Evers, Manager, Climate Change & Sustainability or Anne-Cécile Moreno, Climate Risk & Decarbonization lead.

Learn more about climate risk scenarios and Net-Zero decarbonization pathways