Written submission from Jenny Bird, Raffaele Della Croce and Dr Ajay Gambhir (ECO0022)

About us

This response has been developed by:

• Jenny Bird, Grantham Institute, Imperial College London
• Raffaele Della Croce, Centre for Climate Finance & Investment, Imperial College Business School
• Dr Ajay Gambhir, Accelerator for Systemic Risk Assessment (ASRA); Grantham Institute, Imperial College London

About the Grantham Institute

The Grantham Institute sits at the heart of Imperial College London’s work on climate change and the environment. We drive forward discovery, convert innovations into applications, train future leaders and communicate academic knowledge to businesses, industry, and policymakers to help shape their decisions.

About the Centre for Climate Finance & Investment

The Centre’s purpose is to unlock solutions within capital markets to address the challenges posed by global climate change. Through collaboration between academics and practitioners, we are generating a new understanding of the risks and investment opportunities arising in this changing climate; through climate scenarios, nature based-solutions, renewable energy, and climate-resilient infrastructure.

About ASRA

ASRA, the Accelerator for Systemic Risk Assessment, is an independent non-profit initiative hosted by the United Nations Foundation. It aims to mainstream systemic risk assessment in policy and decision-making in response to current and future challenges. Its mission is to accelerate transformative action that protects the earth’s ecological systems and humanity from the threats of interconnected, global risks.

Summary

• Unavoidable climate change will pose direct and indirect physical risks to the UK (including extreme weather, heatwaves, rising sea levels, health impacts, water scarcity, supply chain disruption and damage to infrastructure).
• These risks threaten economic stability in a number of ways:
• Corporate exposure to physical risks
• Household exposure to physical risks
• Risks to the financial system
• Direct and indirect fiscal risks.
• Some estimates of potential impacts to GDP exist, but there are limitations to economic modelling which mean that these are likely to be at the lower end of possible outcomes and that economic damages may be more severe.
• The risks posed by climate change impacts may be higher than is commonly realised because of limitations in modelling and data availability.
• The UK does not yet have targets or standards to set out the desired level of resilience to climate impacts.

What are the main economic security threats, and what principles should underly the UK’s response to them?

Physical risks posed by climate change

Climate change poses two types of risk to the economy: transition risks (which relate to the transition to a low-carbon economy) and physical risks (which relate to the impacts of increased exposure to climate hazards like extreme weather and sea level rise). This submission focuses on physical risks.

The impacts of climate change resulting from historic emissions of greenhouse gases are becoming increasingly obvious. The wildfires that ravaged Los Angeles earlier this year were made more likely because of human-caused climate change.[1] Closer to home, the 2023-24 autumn and winter storm rainfall in the UK was made about 20% heavier by human-caused climate change[2] and the record-breaking 40°C temperatures experienced in England in July 2022 would have been extremely unlikely without climate change.[3] These are the types of impacts we already experience in today’s climate, with around 1.3°C global warming compared to preindustrial temperatures. But temperatures will continue to rise as long as we continue to emit greenhouse gases into the atmosphere; scientists expect temperatures to exceed 1.5°C (the goal set out in the Paris Agreement) within the next decade[4] and we are heading for around 2.7°C of warming by the end of the century.[5]

Physical risks associated with climate change include direct risks, such as:

• Increased likelihood and intensity of extreme weather events (extreme rainfall, storms, heatwaves and so on).
• Changes in precipitation patterns (for example, leading to threats such as droughts).
• Rising sea levels.

There are also associated indirect and cascading risks, such as:

• Negative impacts to human health
• Ecosystem disruption
• Food insecurity
• Water scarcity
• Displacement and migration
• Supply chain disruption
• Damage to infrastructure and public services

Finally, for every fraction of a degree that temperatures rise, the risk of triggering potentially irreversible tipping points grows. These include (among others):

• breakdown of the Atlantic Meridional Overturning Circulation (AMOC), which plays a crucial role in maintaining a climate that is suitable for farming in the UK,
• disintegration of the Greenland ice sheet, and
• Amazon rainforest dieback.[6]

How do physical climate risks threaten economic stability?

Physical climate risks pose a threat to economy security through a range of different mechanisms.

1. Corporate exposure to physical risks. The Taskforce on Climate-related Financial Disclosure sets out how physical risks may manifest for businesses. The list includes:

• Reduced revenue from decreased production capacity, decreased worker productivity and/or lower sales.
• Damage to property and assets and associated increased capital costs.
• Increased operating costs.
• Increased insurance premiums and/or reduced availability of insurance.[7]

An additional risk is exposure to other sectors that might be affected by climate impacts – for example, damage to critical infrastructure such as transportation systems or energy systems may affect a business’s ability to operate. Similarly, exposure through value chains can pose a threat.[8]

2. Household exposure to physical risks

• Damage to property and assets and associated costs for repair work.
• Increased insurance premiums and/or reduced availability of insurance.
• Reduction in the value of assets, for example reduced property value in areas where flood insurance is not available. [9]
• Reduced capacity to work caused by negative health impacts, resulting in reduced incomes and/or increased reliance on state benefits.

3. Risks to the financial system. The Bank of England has explored how climate risks could impact the financial system and the real economy through channels including:

• Impacts on corporates (see above).
• Impacts on bank and market-based lending if corporates’ ability to service debt is impaired or the value of collateral is reduced.
• Reductions in the value of assets as a result of increased cost of insurance or reduced availability of insurance.
• Increased risk of mortgage defaults as a result of damage to property and reduced value of housing assets (see above)
• Impacts to financial markets resulting from changes in the default probability of borrower firms affecting the value of corporate credit assets.
• Impacts to the financial system resulting from direct disruption caused by climate impacts (such as extreme weather causing an outage at a major firm).
• Longer-term feedback loops such as disruption to the financial system making adaptation action more difficult and hence increasing exposure to intensifying physical risks.[10]

4. Risks to public finances. The OBR has assessed the economic and fiscal costs of climate-related damage, including:

• direct fiscal risks resulting from reduced value of public assets (such as damage to transport infrastructure),
• direct fiscal risks resulting from increased demands on public services (such as the health system and emergency services),
• direct fiscal risks associated with expectations that the state may act as the ‘insurer of last resort’ and compensate uninsured losses, and
• indirect fiscal risks resulting from reduced economic output (see above) and resulting decreased tax revenue.[11]

How much could climate impacts cost us?

We summarise some recent estimates of potential costs resulting from climate damage below. (Please note, this is not a systematic review, but these examples are provided merely as illustrations of the potential scale of damage to the economy.)

Boston Consulting Group and University of Cambridge (2025)

This report, published in March 2025, estimates costs at a global level: “The net cost of inaction—that is, the cost of not addressing climate change after accounting for the investment required for mitigation and adaptation—equates to 11% to 27% of cumulative economic output” (from 2025 to 2100).

Importantly, the authors also note that “the economic damages of climate change are not understood by economists to their full extent or with enough detail” and that “the current models have three significant limitations that make it possible that climate change will cause more severe economic damages—and sooner—than our baseline scenario”.[12] (These limitations are explored further below.)

Network for Greening the Financial System (NGFS) (November 2024)

The latest set of scenarios from the NGFS found that GDP losses by 2050 could be 15% (under a ‘Current Policies’ scenario) or 7% (under a ‘Net Zero 2050’ scenario).

Limitations to the modelling should be noted: “the scenarios do not claim to capture the exhaustive impact of climate change (e.g. the impact of tipping points). Caution should always be exerted when using the NGFS scenarios and damage function results, especially in light of the high uncertainty surrounding these projections”.[13]

OBR Fiscal risks and sustainability (September 2024)

The Office for Budgetary Responsibility examined the fiscal costs of physical damage caused by climate change. Taking indirect, direct and financing costs into account, over the next 50 years climate damages are projected to:

-          “increase debt by around 23 per cent of GDP under our below 2°C scenario; and

-          Increase debt by around 33 per cent of GDP under our below 3°C scenario”.

The authors note that their estimates are “likely to be at the lower end of plausible outcomes”. This is because:

-          more extreme increases in global temperatures are not considered;

-          only a subset of physical risks is considered, which excludes more catastrophic risks such as breaching a tipping point or the transmission of the economic impact of significant climate damages elsewhere in the world; and

-          it does not account for the costs of adaptation.[14]

Rising et al (2022) What will climate change cost the UK? Risks, impacts and mitigation for the net-zero transition.

This study, published by LSE, calculated the costs of climate impacts to the UK and found that under current global policies to reduce greenhouse gas emissions, “the total cost of climate change damages to the UK are projected to increase from 1.1% of GDP at present to 3.3% by 2050 and at least 7.4% by 2100.

The analysis focuses on nine key “impact channels” (droughts and flooding, agriculture, livestock and fisheries, ecosystems, energy supply and demand, labour productivity, health, coastal impacts and trade effects). The authors note that there are other channels in addition to these and that therefore “the results presented in the report are conservative, lower-bound estimates of the costs of climate change to the UK. It seems likely that some of these missing channels will emerge as disruptive and costly”. [15]

What are the most important gaps in the UK’s economic security regime? How should these be addressed? What is the right level of tolerance for risk?

1. Underestimation of physical climate risks

A recent report by the Institute and Faculty of Actuaries and University of Exeter found that “policymakers are likely to have accepted much higher levels of risk than is commonly realised”. This is a result of inadequacies in economic and risk assessment methodologies that are commonly used in policy assessments.[16]

Risk assessments – limitations in modelling

There are several limitations to current economic modelling that mean models are likely to underestimate the risks associated with physical climate impacts.[17] These include:

• Exclusion of “fat tail” risks. Economic models tend to focus on average outcomes, rather than low-probability but high-impact events.[18] The consequence may be a failure to consider the “worst case scenario” in resilience planning.
• Simplification of earth system models, which may result in an underestimate of the future rate of global warming (and hence lead to an underestimate in associated economic damages).[19]
• Reliance on historical data, rather than forward-looking data that better reflects our changed climate.[20]
• Exclusion or partial modelling of indirect effects and broader impacts such as systemic risks, civil unrest and involuntary migration.[21]
• Failure to account for tipping points and feedback loops.[22]
• Failure to consider value-chain exposures.[23]

A report by the Institute and Faculty of Actuaries and University of Exeter recommended that “financial institutions should be encouraged to develop plausible qualitative and quantitative scenarios alongside regulatory ones” and that “model development [is] required to better capture risk drivers, uncertainties and impacts”.[24]

Risk assessments – limitations in data

Availability of data can also hamper risk assessments. For example:

• There is often a need for more granular data (for example at the asset level, rather than broader geographical areas). Proxy data is often used instead. [25]
• A lack of data/understanding about climate impacts in other sectors can be a barrier to assessing interdependency risks. [26]
• Concerns about data sharing are a barrier to assessing interdependency risks.[27]
• Inconsistencies across sectors in measuring and reporting risks can pose a barrier to thinking about interdependencies. [28]

Barriers to action

In its White Paper on Business Efforts to adapt to Climate Change, the World Economic Forum identifies six barriers that prevent businesses taking action to address physical climate risks:

1. Physical climate risk is not deemed to be a risk. This can be a result of a mis-match between business planning time horizons and the timescales on which businesses think climate risks will manifest. Alternatively, limitations in data and modelling can result in an underestimation of potIeintial financial impacts (see above). Finally, risk assessments may be too limited in scope (for example excluding upstream and downstream value chains).
2. A perception that physical risk can be managed (for example through insurance).
3. A lack of human resources and technical expertise.
4. The large potential cost of some adaptation measures.
5. Difficulty in making the investment case for adaptation. It can be difficult to quantify the potential economic losses associated with climate change and the benefits of adaptation measures using traditional approaches.
6. A lack of policy and regulatory incentive to act.[29]

Solutions

A study of financing adaptation and resilience in London and the UK identified a range of measures that might be helpful in overcoming barriers to investment and finance in adaptation. They fall broadly into four categories:

1. Market creation (including asset planning, mainstreaming, standards, valuation, and cost-benefit measurement).
2. Adaptation investment (including business models, aligning with carbon markets, resilience standards and green/adaptation bonds).
3. Mobilising private sector finance (including risk assessment, disclosure and specialised investment vehicles).
4. Nature, knowledge systems and capability at local level (including AI and data analytics, integration of nature in the built environment and local financing solutions).

More detail on each of the aspects is set out in a policy briefing:

Della Croce R., Whittaker S., and Hlavackova C., (2024), Financing Adaptation and Resilience in London and the UK: Moving from Aspiration to Reality, Singapore Green Finance Centre, Imperial College Business School, Singapore Management University and Lee Kong Chian School of Business, November 2024

2. Lack of resilience standards and targets

In its inquiry into resilience and extreme weather, the Public Accounts Committee noted that ‘for most extreme weather risks government has not set out what level of resilience it wants to achieve or how it will attain this, including targets and standards for the desired level of national, local or sectoral resilience’.[30] The absence of such targets means that it is up to individual Ministers to decide what is an acceptable level of risk for individual policy decisions. This need for resilience standards has also been voiced repeatedly by the Climate Change Committee and by the National Infrastructure Committee, which has also developed proposals for how resilience standards might be implemented.[31], [32] 

April 2024