Picture by Long Ma on Unsplash

Global temperatures have risen quickly since last summer, which was unexpected. New surface air temperature highs were set in each of the last ten months, and the warmest monthly global sea surface temperature was documented in March 2024. The World Meteorological Organization (WMO) declared 2023 as the hottest year since scientists have kept track. Records were broken for ocean temperatures, sea-level rise, ice loss, and glacier retreat. According to the WMO, “heatwaves, floods, droughts, wildfires, and rapidly intensifying tropical cyclones caused misery and mayhem, upending everyday life for millions and inflicting many billions of dollars in economic losses.”

Global warming is accelerating faster than models predicted

Given their conservative bias (“erring on the side of least drama”), climate scientists may have underestimated the pace and significance of climate change. Most climate models don’t consider all of the feedback loops that make global warming worse, adding to their inaccuracy.

What are the implications for risk experts when they are briefing senior management, contributing to risk reports, and assessing the risks that clients, suppliers, and investee companies face?

Physical risks are likely to emerge faster than anticipated

As the atmosphere warms it retains the heat as energy, causing climate volatility and more severe weather events. Unless greenhouse gas emissions are rapidly reduced, temperatures will continue to rise, says Samantha Burgess, deputy director of Copernicus Climate Service.

We consider it unlikely that society will reduce emissions by enough, soon enough. Most political bodies are preoccupied with multiple crises and tend to prioritize other emergencies. Even if emissions were drastically curtailed tomorrow, it would still take centuries to turn down the knob on the world’s stove. If today’s average temperatures are melting polar ice and glaciers, they will continue to do so for a long time and sea levels will continue to rise. Therefore, companies should prepare for substantial physical risks to appear faster than the climate models predict.

Transition risks will take some companies by surprise

In a previous editorial, we explained why it’s likely that multiple industries will experience disruption. One of the reasons is that political involvement will increase as physical risks mount. The longer it takes for regulators to respond, the more likely it is that their actions will be drastic and far-reaching. In 2021, Blackrock claimed that the markets are not prepared for the profound changes that are coming, and that the path ahead is unlikely to be smooth.

Future liability risks are inevitable and require appropriate mitigation

In 2014, we warned about climate-related liabilities, particularly if insurance companies stop covering claims. That is already happening, so those affected will pursue other avenues for compensation. Reports, like this one from the European Central Bank, question the efficacy of companies’ voluntary climate commitments. Mere undertakings will not ward off damages claims. Companies must instead reduce the adverse impacts of their business activities.

We are optimistic that insights from scenario analysis, such as the “too little, too late” or the “disorderly” scenarios developed by the central banks and supervisors of the Network for Greening the Financial System, will motivate policymakers to increase climate action. We remain hopeful, but hope is not a risk management strategy.

Olivier Jaeggi and Jen Guillemin