The economic toll of extreme weather events

The Economic Toll of Extreme Weather Events

Extreme weather events have become increasingly frequent, exemplified by this summer’s devastating wildfires in Maui, Hawaii & Rhodes, Greece. The world is experiencing an alarming surge in the frequency, severity, and unpredictability of these events, primarily driven by climate change. According to the World Meteorological Organization (WMO), extreme weather events have increased by a factor of five from 1970 to 2019, though there was a slight decline between the 2000s and 2010s. This trend, however, masks the fact that these events have grown more severe and less predictable in terms of timing and location. The impact of these weather events has been:

    1. Escalating damages & disruptions
    2. Climate change connection
    3. Escalating costs
    4. Urban & coastal vulnerabilities
    5. Extreme weather needs extreme policies
Extreme weather events

Escalating Damages and Disruptions

To illustrate the magnitude of this issue, consider the devastating floods that struck Germany, Belgium, Luxembourg, and the Netherlands in July 2021. These floods resulted in an estimated $43 billion in damages and tragically claimed around 200 lives. This level of flooding and destruction was unparalleled in the region’s history, with climate change-induced factors like abnormally high water levels in rivers exacerbating the situation.

Similarly, more than 700,000 people in Sudan were displaced by the most severe storms since 1962. In central China’s Henan province, floods led to dozens of fatalities, displaced over 250,000 people, and disruptions to critical industries like coal transport, aluminium production, and even iPhone manufacturing.

Climate Change Connection

The latest assessment report from the Intergovernmental Panel on Climate Change (IPCC) affirms that human-caused emissions are driving temperature increases, leading to more frequent and intense extreme weather events. Burning fossil fuels is the primary contributor to rising concentrations of greenhouse gases (GHGs), pushing global temperatures 1.2°C above pre-industrial levels. The last three decades have consistently been warmer than any preceding decade since 1850, with most of this warming occurring in the past 35 years. Alarming trends in rising air and ocean temperatures, dwindling snow and ice cover, and shifts in atmospheric and oceanic circulation further contribute to regional weather pattern changes, ultimately leading to more frequent droughts, floods, and tropical storms. Some of these processes even potentially release additional GHGs into the atmosphere, creating a dangerous feedback loop that perpetuates warming.

Escalating Costs

While extreme weather events have increased by over fivefold in the last few decades, the economic costs associated with these events have surged nearly eightfold globally (inflation-adjusted) since the 1970s. This translates to a staggering 77% increase (inflation-adjusted) in the cost per event over the past half-century. As the frequency and severity of extreme weather events continue to rise, their direct economic impact continues to climb.

On a broader scale, vulnerabilities to storms, floods, water scarcity, disease outbreaks, reduced agricultural output, and ecological shifts pose substantial investment risks. In particular, investors should be attuned to the potential for costly physical damage, productivity losses, climate-driven migration, supply chain disruptions, and an overall uptick in uncertainty. Collectively, these factors threaten both short-term and long-term economic growth.

Urban and Coastal Vulnerabilities

Urban and coastal areas are especially susceptible to the costs associated with storms and flooding. Repairing and replacing property in densely populated regions is more expensive. Developing coastal areas often destroy natural defences like mangroves and coral reefs, further heightening vulnerability to extreme weather. A staggering 40% of the global population resides within 100 kilometres of coastlines, as the United Nations estimates. With cities projected to house 68% of the global population by 2050 (up from 55% today), rising urbanisation will only increase the risk of weather-related costs. Emerging economies, where urbanisation is surging, are particularly susceptible to the impacts of extreme weather events.

Extreme Weather Needs Extreme Policies

Extreme weather events’ escalating frequency and costs underscore the urgent need for mitigation and adaptation efforts. These events introduce uncertainty regarding the availability of food, goods, and labour, affecting investment, consumption, and trade. As a result, policymakers and governments will face challenging decisions in response to the disruption caused by extreme weather events in the coming decades.

ESG is a branch of investing focusing on being more socially conscious and responsible. It aims to maximise Environmental, Social, and governance outcomes. Read about ESG investing here.

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Hoxton Capital

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