Who Cashes In and Who Gets Left Holding the Bag on Planetary Havoc

Heat waves tell only part of a larger tale. Fires are on the rise, floods are increasing in number and droughts are becoming more expensive — and by most conventional reckoning, financial markets should be adapting to that fact. In pockets, they are. But zoom out and it becomes clear the broader picture is reversed: capital is still flowing towards the activities that create this risk more quickly than it’s flowing toward protecting against it, real-world damage is multiplying faster than the balance sheets are adjusting for it and the lag between physical risk and financial price is (rather than a chasm) getting wider.

The macro number beneath it all. Before breaking out the fire and drought in general, it needs to be considered in the larger sense. A study by the Potsdam Institute for Climate Impact Research, published in Nature discovered that climate damage already baked in with previous emissions will reduce global GDP by about 19% by 2049 compared with a world without additional warming — around $38 trillion in the same number of dollars each year by 2050 (and a reasonable range of those figures of $19–59 trillion depending on climate variability of the scale). That’s the case even so under tough emissions cuts (because the damage is now baked into the system), and it just depends on how much worse after 2050 it becomes. Exposure within regional patterns is uneven: similar research indicates income losses, well in excess of the global average, over South Asia and Africa but not even wealthy economies like the U.S., Germany and France can afford to be insulated. Separately, the Swiss Re Institute was modeling a scenario where 3.2°C of unmitigated warming could wipe out as much as 18% of global GDP by mid-century, while China’s exposure is about 24% and ASEAN economies would lose more than 35% if left unchecked. Whoever turns out to be closest, it’s the direction: climate damage is accreting into a variable in long-run GDP forecasting. Less straightforward is whether financial markets are factoring that in at the speed at which the damage is growing — the sections below indicate almost none of them are.

Fire, drought and heat are the three channels that are causing most of the damage in the near term, and are all producing their own data sets.