Climate change could take 18% off global GDP, warns Swiss Re

Driving home the importance of climate risk mitigation, resilience building and also the role of insurance or reinsurance in providing climate risk transfer, global reinsurer Swiss Re warns that the world’s economy risks a significant hit as the climate changes.

If no mitigating actions are taken to prevent or build resilience to climate change, a study by Swiss Re shows that there could be as much as an 18% hit to global GDP by 2050.

That’s aligned with a 3.2°C increase in global temperatures.

If some mitigating actions are taken then a 2.6°C increase would only mean a 14% hit to GDP, a 2°C increase an 11% hit to GDP and even if the world can keep global warming to under 2°C, hitting Paris Agreement targets, reinsurance firm Swiss Re still estimates that global GDP will take a negative hit of 4%.

Asian economies are the most exposed to warming and climate change, Swiss Re’s new Climate Economics Index stress-tests show.

In fact, China could face as much as a 24% hit to its GDP if the worst-case scenarios of unfettered warming occurs, while the US could lose close to 10% of its GDP and Europe almost 11%.

Decisive action needs to be taken to align with the Paris Agreement goals, or better, Swiss Re believes.

Thierry Léger, Group Chief Underwriting Officer and Chairman of the Swiss Re Institute, explained “Climate risk affects every society, every company and every individual. By 2050, the world population will grow to almost 10 billion people, especially in regions most impacted by climate change. So, we must act now to mitigate the risks and to reach net-zero targets. Equally, as our recent biodiversity index shows, nature and ecosystem services provide huge economic benefits but are under intense threat. That’s why climate change and biodiversity loss are twin challenges that we need to tackle as a global community to maintain a healthy economy and a sustainable future.”

Swiss Re sees the pension fund and insurance or reinsurance industry as both being key players in helping the world as it transitions and seeks to achieve the Paris goals.

“The public and private sectors can facilitate and accelerate the transition, particularly regarding sustainable infrastructure investments that are vital to remain below a 2°C temperature increase. Given the long-term horizon of their liabilities and long-term capital to commit, institutional investors such as pension funds or insurance companies are also ideally positioned to play a strong role,” the reinsurance company explained.

Jérôme Haegeli, Swiss Re’s Group Chief Economist, commented, “Climate change is a systemic risk and can only be addressed globally. So far, too little is being done. Transparency and disclosure of embedded net-zero efforts by governments and the private sector alike are crucial. Only if public and private sectors pull together will the transition to a low-carbon economy be possible. Global cooperation to facilitate financial flows to vulnerable economies is essential. We have an opportunity to correct the course now and construct a world that will be greener, more sustainable and more resilient.

“Our analysis shows the benefit of investing in a net-zero economy. For example, adding just 10% to the USD 6.3 trillion of annual global infrastructure investments would limit the average temperature increase to below 2°C. This is just a fraction of the loss in global GDP that we face if we don’t take appropriate action.”

“Re/insurers also play a role in providing risk transfer capacity, risk knowledge and long-term investment, using their understanding of risk to help households, companies and societies mitigate and adapt to climate change,” Swiss Re said.

The pension fund investor world has a significant role to play in investing in resilience, cutting out carbon related investments, and also in this provision of risk transfer capacity, we would add.

Given the size of the exposure that exists to rising climate temperatures and climate change, there is likely a need for more capacity than the traditional reinsurance sector can provide, making the capital markets an ideal partner for sourcing the risk capital to buffer economies against climate change, while supporting their efforts to mitigate it and build resilience to it.

As we’ve explained before, climate risk is expected to drive massive demand for contingent risk capital and Swiss Re’s forecast that economies face a GDP hit even if they meet the Paris climate goals suggests the demand for this capacity will begin to be seen relatively soon.