A global increase in greenhouse gas (GHG) concentration in our atmosphere has caused a record-breaking pace of temperature rise, and the rate of change is still increasing. Since the 1880s, the average global temperature has increased by 1.1 degrees Celsius. A destructive trend of impacts has emerged, from stronger hurricanes to intensified droughts and rising sea levels: climate change is already causing large-scale damage to communities around the world.
As global warming continues, these negative impacts will likely be nonlinear. Society and global infrastructure has previously been constructed to withstand certain remote extremes, like “100-year” floods. Once certain climatic thresholds are breached, the conditions for these extremes align more often, the damage they cause multiplies, and the knock-on costs skyrocket. McKinsey describes a hypothetical 100-year flood hitting Ho Chi Minh City today vs. in 30 years: They predict a 2-3x increase in direct damages in 30 years compared to today, but a 15-20x increase in knock-on damages.1
The only way to halt further warming and associated risk increases is to achieve zero net greenhouse gas emissions. We are a long way from that today; Atmospheric CO2-equivalents are currently at around 415 ppmv (parts per million by volume), up from 280 ppmv about 150 years ago, and are growing at more than 2 ppmv per year. Even in the most optimistic GHG pathway from the IPCC, the so called Representative Concentration Pathway (RCP) 2.6 scenario, concentra- tions will continue to rise through around 2040, relying on a remote possibility that annual emissions decline substantially in the very near term.
Considering the very significant costs of inaction, decarbonizing the global economy represents a massive economic opportunity. Over the next 30 years, nearly $10 trillion of investment is expected to flow into renewable power generation globally, compared to less than $2 trillion into fossil fuel plants. Another $10 trillion is expected to be required for electrical grid expansions, largely driven by the new renewable generation. Electric vehicles are a significant driver of electricity demand, yet represent a very large investment opportunity on their own; by 2040, we expect that electrical vehicles will constitute the majority of new passenger vehicle sales.
We also view climate change adaptation as a source of significant new economic opportunities, with very high benefit-to-cost ratios. Hardening infrastructure in affected areas may be the largest need, but we also see opportunities in areas like improving water management and strengthening early warning systems. Across all these sectors, we see investment needed into large- scale projects like levies and stormwater drainage, but also at the consumer level, into products like cooling systems or hardening of residential construction.
Climate change is the single largest challenge we face in the years to come – but also the single largest opportunity. We believe that the increase in greenhouse gases will eventually turn, but we cannot predict with any certainty when that will happen. Accordingly, we not only work with companies and technologies that mitigate greenhouse gas emissions, but also with those that accelerate our efforts to adapt to the effects of climate change. We view both mitigation and adaptation as crucially important, and as significant economic opportunities.
1 McKinsey: Climate risk and response, January 2020