When the Australian bushfires early this year were causing destruction on a massive scale, burning more than 18 million hectares of bush, forest and parks across the country, the global attention being given to the issues of environment and climate change reached new heights. But the topic has been side-lined by the coronavirus outbreak, which has dominated news headlines ever since.
Without a doubt, the global economy will be hammered by Covid-19 for some time to come. However, the impact of climate change on the overall economy is definitely, given time, one that will be more long-lasting and profound. While sectors such as agriculture, forestry, insurance, energy and tourism are directly exposed to the risks, most other industries will also be affected one way or another.
As to the likely scale of the impact, there are some studies which may provide clues from both short- and long-term perspectives. Munich Re, a reinsurance firm, blamed global warming for US$24 billion of losses in the 2018 California wildfires alone. A research paper published last year by the U.S. National Bureau of Economic Research showed that climate change would have a significantly negative impact on economic growth over the long run, using data of 174 countries from 1960 to 2014.
Per-capita real GDP growth is estimated to be adversely affected by persistent changes in the temperature above or below its historical norm. Specifically, a constant increase in average global temperature by 0.04°C per year, in the absence of mitigation policies, may reduce world real GDP per capita by 7.22% by 2100. In a less gloomy forecast, if countries can work together under the Paris Agreement to limit the temperature increase to 0.01°C per year, then the loss will be reduced substantially to just 1.07%.
In fact, climate change will have implications on not only policymaking but also the financial and banking systems. These include the potential impacts on economic growth and hence fiscal and monetary policies, risks to the insurance and banking sectors due to more frequent weather-related natural disasters, and changes in pricing of carbon-based fuels relative to renewable energy during the transition to a “greener” economy.
Some major central banks have begun to address the climate change issue proactively. Christine Lagarde, President of the European Central Bank, has said that she would make climate change a “mission-critical” priority during her term. Meanwhile, the Bank of England has launched a “stress test” plan to assess the UK financial system’s exposure to climate-related risks, and determine how well banks and insurers are prepared.
There have been many discussions on “capitalism versus the climate” in the past, which assumes that the interests of the business community are incompatible with environmentally friendly practices. However, this attitude is shifting. Recent developments in sustainable business, green finance, Environmental, Social and Responsibility (ESG) reporting and the like have gradually made the public and corporates aware of the potential alignment of business and environmental objectives.
There are increasing signs that the corporate world is picking up on this particular issue. For instance, Andrew McAfee, Principal Research Scientist at the MIT Sloan School of Management, found that the United States is apparently on course for “dematerialization” – at least for some goods. He pointed out that the total consumption of some important metals in the U.S. has passed its peak, thanks to technological progress and market forces.
One example is the thinner cans used for drinks, as consumers prefer lighter cans while at the same time manufacturers want to save costs on materials. The first generation of aluminium cans in the 1950s weighed approximately 85g, compared to less than 15g nowadays.
Technological advancements have also made many stand-alone gadgets – such as calculators, compasses, music players and cameras – more or less dispensable as their functions are already built into a smartphone.
Market forces are also driving money into investments or projects committed to sustainability. According to Morningstar, “sustainable” funds attracted US$20.6 billion in 2019, nearly four times the amount in the previous year. Blackrock, one of the world’s biggest money managers, has announced that it will offer more green investment options to meet clients’ demand; Goldman Sachs has also planned to spend US$750 billion over the next ten years on similar themes.
The coronavirus pandemic may have brought positive impacts to the environment, and consequently the economy and policymaking as well. According to the International Energy Agency, global CO2 emissions are expected to decline by 8% in 2020, back to the levels of 10 years ago. The lower energy prices that come with the global recession have made it easier for some governments to cut fossil fuel subsidies. Such subsidies are intended to help consumers by keeping prices low, but have the unintended consequence of encouraging excessive energy consumption.
Joe Biden has pledged to bring the U.S. back to the Paris climate agreement on the first day of his administration, reversing President Donald Trump’s decision to pull the country out of the deal. Biden also plans to spend US$2 trillion over four years to help reduce carbon emissions. Such efforts will certainly push businesses to move in the same direction in order to comply with the anticipated regulatory changes.
We don’t have a crystal ball to see how the coronavirus pandemic will evolve in the coming months, never mind how the planet will look in 100 years’ time. However, as the looming impact of climate change and other environmental issues are not far away, we should make preparations before it is too late.
The uncertainties arising from climate change warrant more coordinated international responses to ensure that global growth and sustainability are not threatened. This is what good risk management should look like – a lesson we have learnt from Covid-19.
Wilson Chong, wilson@chamber.org.hk