Climateriskandresponse:PhysicalhazardsandsocioeconomicimpactsJanuary 2020Climate risk and responsePhysical hazards and socioeconomic impactsMcKinsey Global InstituteSince its founding in 1990, the McKinsey Global Institute (MGI) has sought to develop a deeper understanding of the evolving global economy. As the business and economics research arm of McKinsey it is not commissioned by any business, government, or other institution. For further information about MGI and to download reports for free, please visit mckinsey/mgi.In collaboration with McKinsey external shifts such as unpredictable geopolitical environments and climate change; and an evolving reputational risk landscape accelerated and amplified by social media. We apply deep technical expertise, extensive industry insights, and innovative analytical approaches to help organizations build risk capabilities and assets across a full range of risk areas. These include financial risk, capital and balance sheetrelated risk, nonfinancial risks (including cyber, data privacy, conduct risk, and financial crime), compliance and controls, enterprise risk management and risk culture, model risk management, and crisis response and resiliencywith a center of excellence for transforming risk management through the use of advanced analytics. mckinsey/ business-functions/riskAuthorsJonathan Woetzel, ShanghaiDickon Pinner, San FranciscoHamid Samandari, New YorkHauke Engel, FrankfurtMekala Krishnan, BostonBrodie Boland, Washington, DCCarter Powis, TorontoPhysical hazards and socioeconomic impactsClimate risk and responseJanuary 2020PrefaceMcKinsey has long focused on issues of environmental sustainability, dating to client studies in the early 1970s. We developed our global greenhouse gas abatement cost curve in 2007, updated it in 2009, and have since conducted national abatement studies in countries including Brazil, China, Germany, India, Russia, Sweden, the United Kingdom, and the United States. Recent publications include Shaping climate-resilient development: A framework for decision-making (jointly released with the Economics of Climate Adaptation Working Group in 2009), Towards the Circular Economy (joint publication with Ellen MacArthur Foundation in 2013), An integrated perspective on the future of mobility (2016), and Decarbonization of industrial sectors: The next frontier (2018). The McKinsey Global Institute has likewise published reports on sustainability topics including Resource revolution: Meeting the worlds energy, materials, food, and water needs (2011) and Beyond the supercycle: How technology is reshaping resources (2017). In this report, we look at the physical effects of our changing climate. We explore risks today and over the next three decades and examine cases to understand the mechanisms through which physical climate change leads to increased socioeconomic risk. We also estimate the probabilities and magnitude of potential impacts. Our aim is to help inform decision makers around the world so that they can better assess, adapt to, and mitigate the physical risks of climate change. This report is the product of a yearlong, cross-disciplinary research effort at McKinsey its scientists are widely published in major scientific journals, testify to lawmakers around the world, and are regularly sourced in major media outlets. Methodological design and results were independently reviewed by senior scientists at the University of Oxfords Environmental Change Institute to ensure impartiality and test the scientific foundation for the new analyses in this report. Final design choices and interpretation of climate hazard results were made by WHRC. In addition, WHRC scientists produced maps and data visualization for the report.We would like to thank our academic advisers, who challenged our thinking and added new insights: Dr. Richard N. Cooper, Maurits C. Boas Professor of International Economics at Harvard University; Dr. Cameron Hepburn, director of the Economics of Sustainability ii McKinsey Global Institute Programme and professor of environmental economics at the Smith School of Enterprise and the Environment at Oxford University; and Hans-Helmut Kotz, Program Director, SAFE Policy Center, Goethe University Frankfurt, and Resident Fellow, Center for European Studies at Harvard University.We would like to thank our advisory council for sharing their profound knowledge and helping to shape this report: Fu Chengyu, former chairman of Sinopec; John Haley, CEO of Willis Towers Watson; Xue Lan, former dean of the School of Public Policy at Tsinghua University; Xu Lin, US China Green Energy Fund; and Tracy Wolstencroft, president and chief executive officer of the National Geographic Society. We would also like to thank the Bank of England for discussions and in particular, Sarah Breeden, executive sponsor of the Bank of Englands climate risk work, for taking the time to provide feedback on this report as well as Laurence Fink, chief executive officer of BlackRock, and Brian Deese, global head of sustainable investing at BlackRock, for their valuable feedback.Our climate risk working group helped develop and guide our research over the year and we would like to especially thank: Murray Birt, senior ESG strategist at DWS; Dr. Andrea Castanho, Woods Hole Research Center; Dr. Michael T. Coe, director of the Tropics Program at Woods Hole Research Center; Rowan Douglas, head of the capital science and policy practice at Willis Towers Watson; Dr. Philip B. Duffy, president and executive director of Woods Hole Research Center; Jonathon Gascoigne, director, risk analytics at Willis Towers Watson; Dr. Spencer Glendon, senior fellow at Woods Hole Research Center; Prasad Gunturi, executive vice president at Willis Re; Jeremy Oppenheim, senior managing partner at SYSTEMIQ; Carlos Sanchez, director, climate resilient finance at Willis Towers Watson; Dr. Christopher R. Schwalm, associate scientist and risk program director at Woods Hole Research Center; Rich Sorkin, CEO at Jupiter Intelligence; and Dr. Zachary Zobel, project scientist at Woods Hole Research Center. A number of organizations and individuals generously contributed their time, data, and expertise. Organizations include AECOM, Arup, Asian Development Bank, Bristol City Council, CIMMYT (International Maize and Wheat Improvement Center), First Street Foundation, International Food Policy Research Institute, Jupiter Intelligence, KatRisk, SYSTEMIQ, Vietnam National University Ho Chi Minh City, Vrije Universiteit Amsterdam, Willis Towers Watson, and World Resources Institute. Individuals who guided us include Dr. Marco Albani of the World Economic Forum; Charles Andrews, senior climate expert at the Asian Development Bank; Dr. Channing Arndt, director of the environment and production technology division at IFPRI; James Bainbridge, head of facility engineering and management at BBraun; Haydn Belfield, academic project manager at the Centre for the Study of Existential Risk at Cambridge University; Carter Brandon, senior fellow, Global Commission on Adaptation at the World Resources Institute; Dr. Daniel Burillo, utilities engineer at California Energy Commission; Dr. Jeremy Carew-Reid, director general at ICEM; Dr. Amy Clement, University of Miami; Joyce Coffee, founder and president of Climate Resilience Consulting; Chris Corr, chair of the Florida Council of 100; Ann Cousins, head of the Bristol offices Climate Change Advisory Team at Arup; Kristina Dahl, senior climate scientist at the Union of Concerned Scientists; Dr. James Daniell, disaster risk consultant at CATDAT and Karlsruhe Institute of Technology; Matthew Eby, founder and executive director at First Street Foundation; Jessica Elengical, ESG Strategy Lead at DWS; Greg Fiske, senior geospatial analyst at Woods Hole Research Center; Susan Gray, global head of sustainable finance, business, and innovation, S Jesse Keenan, Harvard University Center for the Environment; Dr. Kindie Tesfaye Fantaye, CIMMYT (International Maize and Wheat Improvement Center); Dr. Xiang Gao, principal research scientist at Massachusetts Institute of Technology; Beth Gibbons, executive director of the American Society of Adaptation Professionals; Sir Charles Godfray, professor at Oxford University; Patrick Goodey, head of flood management in the Bristol City Council; Dr. Luke J. Harrington, Environmental Change Institute at University of Oxford; Dr. George Havenith, professor of environmental physiology and ergonomics at Loughborough University; Brian Holtemeyer, research analyst at IFPRI; David Hodson, senior scientist at CIMMYT; Alex Jennings-Howe, flood risk modeller in the Bristol City Council; iiiClimate risk and response: Physical hazards and socioeconomic impactsDr. Matthew Kahn, director of the 21stCentury Cities Initiative at Johns Hopkins University; Dr. Benjamin Kirtman, director of the Cooperative Institute for Marine and Atmospheric Studies and director of the Center for Computational Science Climate and Environmental Hazards Program at the University of Miami; Nisha Krishnan, climate finance associate at the World Resources Institute, Dr. Michael Lacour-Little, director of economics at Fannie Mae; Dr. Judith Ledlee, project engineer at Black Dag Lohmann, chief executive officer at KatRisk; Ryan Lewis, professor at the Center for Research on Consumer Financial Decision Making, University of Colorado Boulder; Dr. Fred Lubnow, director of aquatic programs at Princeton Hydro; Steven McAlpine, head of Data Science at First Street Foundation; Manuel D. Medina, founder and managing partner of Medina Capital; Dr. Ilona Otto, Potsdam Institute for Climate Impact Research; Kenneth Pearson, head of engineering at BBraun; Dr. Jeremy Porter, Academic Research Partner at First Street Foundation; Dr. Maria Pregnolato, expert on transport system response to flooding at University of Bristol; Jay Roop, deputy head of Vietnam of the Asian Development Bank; Dr. Rich Ruby, director of technology at Broadcom; Dr. Adam Schlosser, deputy director for science research, Joint Program on the Science and Policy of Global Change at the Massachusetts Institute of Technology; Dr. Paolo Scussolini, Institute for Environmental Studies at the Vrije Universiteit Amsterdam; Dr. Kathleen Sealey, associate professor at the University of Miami; Timothy Searchinger, research scholar at Princeton University; Dr. Kai Sonder, head of the geographic information system unit at CIMMYT (International Maize and Wheat Improvement Center); Joel Sonkin, director of resiliency at AECOM; John Stevens, flood risk officer in the Bristol City Council; Dr. Thi Van Thu Tran, Viet Nam National University Ho Chi Minh City; Dr. James Thurlow, senior research fellow at IFPRI; Dr. Keith Wiebe, senior research fellow at IFPRI; David Wilkes, global head of flooding and former director of Thames Barrier at Arup; Dr. Brian Wright, professor at the University of California, Berkeley; and Wael Youssef, associate vice president, engineering director at AECOM.Multiple groups within McKinsey contributed their analysis and expertise, including ACRE, McKinseys center of excellence for advanced analytics in agriculture; McKinsey Center for Agricultural Transformation; McKinsey Corporate Performance Analytics; Quantum Black; and MGI Economics Research. Current and former McKinsey and MGI colleagues provided valuable input including: Knut Alicke, Adriana Aragon, Gassan Al-Kibsi, Gabriel Morgan Asaftei, Andrew Badger, Edward Barriball, Eric Bartels, Jalil Bensouda, Tiago Berni, Urs Binggeli, Sara Boettiger, Duarte Brage, Marco Breu, Katharina Brinck, Sarah Brody, Stefan Burghardt, Luís Cunha, Eoin Daly, Kaushik Das, Bobby Demissie, Nicolas Denis, Anton Derkach, Valerio Dilda, Jonathan Dimson, Thomas Dormann, Andre Dua, Stephan Eibl, Omar El Hamamsy, Travis Fagan, Ignacio Felix, Fernando Ferrari-Haines, David Fiocco, Matthieu Francois, Marcus Frank, Steffen Fuchs, Ian Gleeson, Jose Luis Gonzalez, Stephan Gorner, Rajat Gupta, Ziad Haider, Homayoun Hatamai, Hans Helbekkmo, Kimberly Henderson, Liz Hilton Segel, Martin Hirt, Blake Houghton, Kia Javanmardian, Steve John, Connie Jordan, Sean Kane, Vikram Kapur, Joshua Katz, Greg Kelly, Adam Kendall, Can Kendi, Somesh Khanna, Kelly Kolker, Tim Koller, Gautam Kumra, Xavier Lamblin, Hugues Lavandier, Chris Leech, Sebastien Leger, Martin Lehnich, Nick Leung, Alastair Levy, Jason Lu, Jukka Maksimainen, John McCarthy, Ryan McCullough, Erwann Michel-Kerjan, Jean-Christophe Mieszala, Jan Mischke, Hasan Muzaffar, Mihir Mysore, Kerry Naidoo, Subbu Narayanaswamy, Fritz Nauck, Joe Ngai, Jan Tijs Nijssen, Arjun Padmanabhan, Gillian Pais, Guofeng Pan, Jeremy Redenius, Occo Roelofsen, Alejandro Paniagua Rojas, Ron Ritter, Adam Rubin, Sam Samdani, Sunil Sanghvi, Ali Sankur, Grant Schlereth, Michael Schmeink, Joao Segorbe, Ketan Shah, Stuart Shilson, Marcus Sieberer, Halldor Sigurdsson, Pal Erik Sjatil, Kevin Sneader, Dan Stephens, Kurt Strovink, Gernot Strube, Ben Sumers, Humayun Tai, Ozgur Tanrikulu, Marcos Tarnowski, Michael Tecza, Chris Thomas, Oliver Tonby, Chris Toomey, Christer Tryggestad, Andreas Tschiesner, Selin Tunguc, Magnus Tyreman, Roberto Uchoa de Paula, Robert Uhlaner, Soyoko Umeno, Gregory Vainberg, Cornelius Walter, John Warner, Olivia White, Bill Wiseman, and Carter Wood. iv McKinsey Global Institute This report was produced by MGI senior editor Anna Bernasek, editorial director Peter Gumbel, production manager Julie Philpot, designers Marisa Carder, Laura Brown, and Patrick White, and photographic editor Nathan Wilson. We also thank our colleagues Dennis Alexander, Tim Beacom, Nienke Beuwer, Nura Funda, Cathy Gui, Deadra Henderson, Kristen Jennings, Richard Johnson, Karen P. Jones, Simon London, Lauren Meling, Rebeca Robboy, and Josh Rosenfield for their contributions and support. As with all MGI research, this work is independent, reflects our own views, and has not been commissioned by any business, government, or other institution. We welcome your comments on the research at MGImckinsey.James Manyika Co-chairman and director, McKinsey Global Institute Senior partner, McKinsey the affected regions will continue to grow in number and size. Since the 1880s, the average global temperature has risen by about 1.1 degrees Celsius with significant regional variations. This brings higher probabilities of extreme temperatures and an intensification of hazards. A changing climate in the next decade, and probably beyond, means the number and size of regions affected by substantial physical impacts will continue to grow. This will have direct effects on five socioeconomic systems: livability and workability, food systems, physical assets, infrastructure services, and natural capital.The socioeconomic impacts of climate change will likely be nonlinear as system thresholds are breached and have knock-on effects. Most of the past increase in direct impact from haza