1.3 Further warming could put an increasing strain on the world economy Climate change is slowing down global GDP growth Compared with the physical impacts of warming, its systemic effects on GDP are more difficult to quantify. Climate-related events have many indirect consequences that are almost impossible to measure. At the same time, it is hard to project to what degree economic systems self-adapt. Even in cases where the immediate consequences are clearer, such as property damage after increased flooding, the sustained strain on GDP is often less obvious. Global warming has several impacts that slow down GDP growth by reducing economic output and/or funnelling resources away from growth-orientated activities. For example: –Reduced labour productivity: Extreme heat reduces productivity, especially in outdoor manual labour such as construction and agriculture. According to the International Labour Organization (ILO), by 2030, heat stress alone could reduce global work hours by 2%.19 –Lower agricultural yields: Increasing droughts and extreme precipitation events reduce agricultural productivity. In recent years, affected regions have seen up to a 10% reduction in yields during extreme weather.20 –Infrastructure and property damage: Climate-related disasters repeatedly destroy infrastructure and property, diverting public and private funds from productive investments towards costly repairs. –Ecosystem decline: The collapse of key ecosystem services, such as wild pollination, marine fisheries and timber, would further impact GDP , particularly in countries reliant on natural resource exploitation.Severe macroeconomic impact could already be felt in the next decades Numerous studies that have attempted to quantify the impact of climate change warn it could already put a material strain on global GDP in the coming decades. By 2100, the current 3°C trajectory could reduce global cumulative GDP by 16% to 22% – that is 10% to 15% more than on a trajectory of less than 2°C. 21 Some recent estimates, such as Kotz et al and the fifth vintage of NGFS’ macroeconomic climate scenarios, indicate that the impacts on GDP of current emissions could be even greater and felt sooner. Global climate action very likely has a positive economic business case Several studies indicate that humanity would need to invest around 2% of cumulative global GDP in mitigation measures to move onto a “below 2°C pathway”. On top of this, around 1% of cumulative global GDP needs to be invested to adapt to already unavoidable warming.22 Given these investments could prevent 10% to 15% in losses to global GDP over this century, they would jointly pay off up to fivefold (see Figure 8). These investments will require government mandates and incentives, as voluntary business actions alone are unlikely to be sufficient. Any delay to emissions reduction in the present will cost humanity dearly in the future both in hard economic terms and through long-term impacts that could fundamentally reshape our societies, such as the increasing risk of mass migration, increased mortality, biodiversity loss and conflicts over resources. There will also be a greater risk of reaching critical environmental tipping points, where damage to lives, nature and the economy would become even more significant. While the long-term benefits of climate action far outweigh the immediate costs, human behaviour is prone to overvaluing short-term expense and underestimating future gain. This mental discounting cognitive bias leads to hesitation, even when the positive net present value of climate action is clear and urgent change is economically justified. By investing 2-3% of cumulative global GDP in mitigation and adaptation measures, humanity could prevent 10-15% in GDP losses over this century. In too many businesses, climate risks are wrongfully perceived as a pure compliance topic. The most advanced companies are looking at them from a financial perspective to inform strategy, risk management and disclosure assurance at the highest levels. Sarah Barker, Managing Director, Pollination Law, Co-Chair of the World Economic Forum’s Climate Governance Community of Experts The Cost of Inaction: A CEO Guide to Navigating Climate Risk 12

The Cost of Inaction 2024