S&P Global Ratings, one of the world’s leading credit rating agencies,has in a recent report warned of the alarming economic impact of climate change on the global economy by 2050. The report stated that climate change is expected to cause significant physical and transition risks to the global economy, leading to a potential reduction in global gross domestic product (GDP) by 4.6 per cent by 2050.
The report, titled “Lost GDP: Potential Impacts of Physical Climate Risks,” outlined a series of climate scenarios based on projected greenhouse gas emissions and temperature changes, and assessed the potential economic exposure of 137 countries to the physical impacts of climate change. It focused on seven specific climate hazards, including extreme heat, flooding, hurricanes, storms, wildfires, drought, and rising sea levels. The report also analysed the economic impact of these hazards on different sectors of the economy, including agriculture, energy, health, manufacturing, real estate, and tourism.
According to the report, the economic impact of natural disasters is already on the rise, with data from Swiss Re showing that annual insured losses have grown at a rate of 5 per cent to 7 per cent per year from 1992 to 2022. The report projected that under a “slow transition” scenario in which the global average temperature rises by 2.1°C by 2050, up to 4.4 per cent of global GDP could be lost annually due to climate change impacts, if no adaptation measures are taken.
S&P Global’s report noted that climate change could cause a range of negative consequences, including reduced water availability, increased energy demand, agricultural disruption, and increased risk of wildfires.
S&P Global found that the developing regions of the world would be disproportionately impacted by the effects of climate change, with lower-income countries facing a greater risk of exposure and being less prepared to address the economic losses associated with climate change. Under the “slow transition” scenario, the report noted that South Asia has the greatest economic exposure to climate change by 2050, with approximately 12 per cent of GDP at risk, followed by sub-Saharan Africa and the MENA region, each with 8 per cent of GDP at risk. By comparison, North America and Europe were found to have a risk exposure of under 2 per cent of GDP.
The credit rating agency emphasised the need for increased investment in climate adaptation to mitigate the risks associated with climate change, noting that one of the biggest challenges to funding adaptation measures is that most adaptation finance is currently provided in the form of debt instruments.
However, financing conditions are currently tightening and may become even more difficult in a high-interest-rate environment. S&P Global stressed the importance of finding innovative solutions to ensure that adaptation finance is available to the countries most at risk from climate change.