Climate change will challenge and change the way we live
Poorest countries in Africa are likely to be the hardest hit
Investment in mitigation and adaptation strategies needed
Judging by global temperature rises over the years, it’s clear climate change will challenge the way we live. To address these risks, investment in mitigation and adaptation strategies is imperative.
In July 2023, United Nations (UN) Secretary General Antonio Guterres said: “The era of global warming has ended; the era of global boiling has arrived.”
His comments were in reaction to news that July was the hottest month on record. The European Union’s Copernicus Climate Change Service reported the global average surface air temperature for July 2023 was 16.95°C. This was the highest for any month since detailed records began in 1940.
What was symbolic about it was that this was 1.5°C warmer than the estimated 1850-1900 average July temperature. The Paris Agreement aims to limit the rise in temperature since 1850-1900 to 1.5°C.
The news has hardly improved since then, with the Copernicus Climate Change Service reporting that March 2024 was hotter than any previous March in data record. This was also the tenth month in a row to be the warmest on record. However, El Nino may be providing a temporary boost that is exaggerating the trend over recent months.
Unfortunately, future climate change is probably baked-in to some extent, since my models suggests that temperature change is related to CO2 emissions over at least the previous 100 years.
Based on UN population estimates, my assumptions about future income growth and the assumption that technological innovation (judged by the pace of reduction of CO2 emissions per unit of GDP) will continue at the recent pace. My model suggests a temperature change of 3.9°C by the end of the century versus the 1850-1900 average. This is displayed in “Recent trends” in Figure 1.
Source: NOAA, Our World in Data, UK Meteorological Office, United Nations, World Bank, LSEG Datastream and Invesco Global Market Strategy Office1
That sort of temperature change would likely have a dramatic effect upon weather patterns. Previous UN reports suggest that such temperature changes could bring large increases in climate related deaths and migration flows that could run into the hundreds of millions.
Some regions such as low-lying coastal areas will simply become uninhabitable. To imagine the wide-ranging potential effects, consider that most financial centres like New York, London, Tokyo and Hong Kong are in coastal areas.
As examples of the implications of temperature gains of 2-4°C, the Stern Review (2006) estimated that extreme weather events could cost up to 0.5%-1.0% of annual global GDP, up from 0.1% in 2005. A permanent GDP loss of 3% could be possible if temperatures rise by 2-3°C and if they exceed 5% the loss could be up to 10%.
However, it doesn’t have to be that bad. Large investments are already being made to mitigate climate change. For example, more than 40% of electricity in Germany and the UK comes from renewable sources.
Technology will be key, and Figure 2 shows one way of looking at how rapidly things are evolving. If we are to reduce CO2 emissions while allowing for incomes and population to rise, we need to reduce the CO2 intensity of economic activity.
This has been happening, but a continuation of recent trends leads to the 3.9°C temperature change prediction. We need to accelerate technological innovation, to “bend downwards” those CO2 intensity curves.
The optimistic scenario in Figure 1 effectively assumes a doubling of the rate of decline in CO2 intensity and reduces the projected temperature change by 2100 to 3.2°C (versus the 1850-1900 average).
That is still not great but, importantly, it gives the hope that changes beyond 2100 would be more dramatic versus the “recent trends” path. Remember, what we do today will not have its full effect for around 100 years.
Source: World Bank, LSEG Datastream and Invesco Global Market Strategy Office2
It is easy on paper to assume a doubling of the rate of technological innovation but far more difficult to achieve. It will require big investments in R&D and is likely to require a lot of pump-priming from governments. We don’t find it easy to spend money today for the benefit of our great-great-grandchildren.
The key areas of innovation in the near future will include advances in battery technology and energy storage. Other innovations will be around harnessing marine energy sources or using hydrogen as a source of fuel. Progress in agricultural technologies will reduce methane emissions, while development is gathering pace in manufacturing electric planes, and solar powered air conditioning.
Unfortunately, climate change is already happening and will get worse. The effects are unlikely to be evenly spread. For example, temperature change will be greatest closest to the poles but those areas close to the equator are already dealing with high temperatures and any increase could be critical.
Also, much of the population that lives in the tropics is poor and those on low incomes are expected to struggle the most. So, poorer countries will often suffer the worst consequences of climate change. There’ll be flooding in some places, drought in others, unliveable temperatures, water and food shortages and these areas are the least able to protect themselves.
Africa exemplifies the problem, with Figure 3 showing the Notre Dame Global Adaptation Index for Climate Change across 53 of Africa’s countries except for South Sudan.
Source: University of Notre Dame, LSEG Datastream and Invesco Global Market Strategy Office3
The Adaptation Index is an assessment of a country’s vulnerability to climate change and its preparedness for those changes (lower scores are worse). The lowest score for any country in the world is 26.9 for Chad, while the highest is for Norway at 75.0. Of the 185 countries covered by this index, only one African country Mauritius is in the top third.
A further 11 African countries are in the middle third, while the remaining 41 are among and dominate the most vulnerable third of countries. The injustice is striking Africa has contributed less than 3% of cumulative CO2 emissions to 2022 but seems destined to suffer the worst consequences.
UN estimates suggest that Africa will account for 41% of the world’s working age (15-64) population by 2100 versus 15% in 2020. Those workers may already be seeking opportunities elsewhere, so to avoid overwhelming migration flows, the rest of the world may want to avoid large parts of Africa becoming uninhabitable.
Around the world, adaptation spending is likely to cover a broad range of categories from building of sea defences, shifting of population centres within countries, water capture and desalination investment.
There’s also agrochemical investment in drought resistant crops, innovations in improving building standards to avoid flood plains and making buildings storm resistant.
Climate change presents both threat and opportunity. Investors are already being confronted with economic losses and increasing costs like insurance. This is only likely to get worse.
It’s probably the biggest externality we will ever face but the nature of externalities makes it hard to deal with because the polluter isn’t made to pay.
However, action now can limit the future damage. Investors can participate in the solution as climate change is likely to become a dominant investment theme for the rest of the century.
Our experts in the Invesco investment teams weigh in on how sufficient investment capital and technical assistance for climate adaptation can empower project developers and developing countries to implement climate-resilient infrastructure
Discover how climate-conscious investors use Carbon Budget Divergence (CBD) and Implied Temperature Rise (ITR) to build Paris-aligned portfolios. Find out more
If we are to live more sustainably by 2030, the Climate Policy Initiative estimates that US $4.3 trillion will be needed annually. Climate adaptation and transition projects are helping, but more finance is needed. Find out more.
1 Notes: based on annual data from 1850 to 2100. It shows the historical global temperature variance (“Temp variance”), which is the global average land-sea temperature anomaly relative to the 1961-1990 average temperature in degrees Celsius, median estimate, as provided by UK Met Office Hadley Centre. “Fitted temp variance” is the result of a regression analysis that fits historical temperature variance to atmospheric CO2 concentration (using the natural logarithm of the 100-year moving average of concentration, on the assumption that temperature at any moment is determined by CO2 concentration during the previous 100 years). “Predicted (recent trends)” applies that fitted relationship to our forecast of CO2 concentrations, assuming that recent trends in CO2 intensity and GDP per capita continue, though with some convergence between World Bank income groups after 2050 (see appendix for details). “Predicted (optimistic)” assumes a doubling of the rate of decline in CO2 intensity (with the added assumption that high income CO2 emissions trend to zero in 2060).
2 Notes: the chart shows the CO2 intensity of GDP annually from 1990 to 2020 for low, middle and high-income countries (as currently defined by the World Bank).
3 Notes: The index summarises a country’s vulnerability to and readiness to deal with climate change (range from 26.9 for Chad to 75.0 for Norway; lower implies greater vulnerability). No data for South Sudan. Abbreviations used: Cen. Af. Rep. = Central African Republic; D. R. Congo = Democratic Republic of The Congo; Eq. Guinea = Equatorial Guinea; Guinea-Bis. = Guinea-Bissau; Rep. Congo = Republic of the Congo; S. Tomé & Pr. = São Tomé & Príncipe.
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
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