Nathan Hunt

Hi. This is the Seek & Prosper interview series from S&P Global. My name is Nathan Hunt. I'm joined today by Marion Amiot, who is the Head of Climate Economics for S&P Global Ratings. And our topic today is going to be physical risks from climate change. Marion, welcome.

Marion Amiot

Thank you. It's nice to be here.

Nathan Hunt

Marion, I'd like to start by understanding what physical climate risks look like for different countries. What does this mean? Are we talking about rising sea levels? Are we talking about the fires we saw in California and Australia, what's the shape of this?

Marion Amiot

So I think there are 2 types of risks we're thinking about when we think about the physical risk of climate change. So on the one hand, you have chronic risks. So you mentioned sea level rise, for example. But there are also a lot of heat waves you can think about. So recently in India, right, we had quite a big one.

And then there are the more acute risks. And those are more -- I guess, it's more difficult to say where they happen, but they can have very strong consequences. So those would be things like storms, water stress, floods and wildfires, as you mentioned, and also draught, I should add.

Nathan Hunt

You and your team have recently completed an analysis of physical climate risk for 135 countries over the next 30 years. And I'm wondering from a methodology standpoint, did you use a single climate model? Or did you use a range of different models?

Marion Amiot

Yes. So we thought about this in a rather simple way, I would say. So we didn't use a lot of models. So certainly for climate change pathways, we looked at 3 different ones. We had to use some climate models. But for the rest, I would say it was more of a mapping exercise.

So there are 3 things we looked at. One is just to assess where those risks will occur in the world. So that's kind of the exposure of countries to climate risk. So for this, we use data from Sustainable1 Trucost, which tells us where the risk occur in different parts of the countries. Then we overlay this with the map of the country economic activity or with the population or where agriculture happens. So it tells us what is the share of wells, which would be affected, for example.

But then in the second step, we said about, "Okay, so we know what is the exposure, but what is it going to cost," right? So we came up with this GDP at risk figure for different regions, which basically adds another layer to the exposure metric by assessing how much those risks have costs in the past. So it adds kind of a damage function to the exposure metric.

But then, again, even though we think about the risk, where they occur and how much it might cost, there's still a lot of time until this happens, right, because we were looking out to 2050. So we had to think about how countries can cope with those risks going forward. So that's why we looked at readiness of countries. And this was a bit of a separate part of the analysis where we looked at what is the economic strength of countries and their institutional profile. So that was a bit more of a qualitative analysis, I would say.

Nathan Hunt

I'd love to follow up on that just to get a specific example. So let's take a country like India, where the share of GDP from agriculture is still actually quite high. When you were looking at the physical risk from climate and you were looking at the effects of climate in India based on the models you've got from Trucost, the mapping exercise, did the share of GDP from agriculture and the likely effects on agriculture, is that how you would weigh things?

Marion Amiot

So that's a good question. So the agriculture part of the country, we thought it will be mainly affected by drought. So that's how we would link the 2. But for heat waves, for example, we thought the most affected or just the people. So that's why we mapped it to the population. And then for the more acute risk like floods and storms or wildfire, it's more difficult to pinpoint who is affected. So for those we just took the whole GDP of the country to map it basically to the risk.

Nathan Hunt

That's fascinating. So a further question on that. When you were mapping heat wave risk to a general population, how do you even assess the effect on GDP for that?

Marion Amiot

So that was a difficult one, I would say. But so we relied on a study from the World Bank, which try to quantify what temperature increases tend to cost for countries, and they specifically look at labor productivity. So that's how we related it to the -- yes, to the losses you can think about on the economic front because I guess as it gets hotter, especially if you're working outside, you can't really do anything.

So we found in this study specifically, they said that the agricultural or construction sectors are the most affected, whereas if you think of services, so those would be kind of office workers, they can have access to AC, so they can still function. So usually, labor product there is less affected. And so that was quite interesting because they are also the way that the economy is set up in a country matters because if you are a country where a lot of the output is agriculture, you'll be much more affected by heat waves just because people are working outside, right?

Nathan Hunt

So you and your fellow researchers looked at a range of different pathways, Paris-aligned sort of current policies and then something I'll call do nothing, which is essentially no one does anything. What kind of impact would we expect to see under each of those pathways?

Marion Amiot

So I guess the first finding, but we probably all know this is the hotter it gets the worse off we will be. And actually, of the 3 scenarios, it's only the scenario where we are aligned to the Paris Agreement that there is not a lot of increase in those physical risk of climate change. But even if we stick to our current pledges today, which is not clear because all the policies have not yet been implemented, we would still face risk to GDP by 2050 of something like 4%.

So that is to say 4% of the global economy would be at risk of losses as a result of those physical risk. And I mean, you might think, okay, 4%, it's not that much. But actually, if you think about COVID-19 in 2020, we saw a drop of GDP globally of 3.4%. So we're talking about a bigger number actually. And we know COVID-19 was nothing, right?

Nathan Hunt

When you looked at these 135 countries around the world, were the outcomes evenly distributed globally, by which I mean do all countries suffer equally under these.

Marion Amiot

So the simple answer is not at all. Actually, that was quite a striking finding for myself is just the scale of the challenge is very different across the world. So you kind of have this geographical split in a way. So usually, it's countries around the equator or small island states which are more affected by those risks. So if you think of the breakdown of the region, we came up with in the study. For example, in South Asia, there is around 15% of GDP at risk of losses in 2050 under the current pledges scenario.

But for Europe, it's just 1% of GDP. So you can see the difference is really large. And then it's not just the geography that is -- yes, that shows the distribution is very uneven, but also across the income of countries, we see quite a big difference. So we found that low and lower middle-income countries will face 3.6x more losses than their richer peers.

And actually, those are the countries which have done little to contribute to climate change because they are not responsible for most of the emissions. But yet at the end of the day, they are more exposed, and they are also the least ready to face those risks because they don't have the same economic capacity to respond and often their institutions are a bit weaker. So that was quite a big finding in the analysis, I thought.

Nathan Hunt

What were you hoping to accomplish with the analysis? No one likes delivering bad news, particularly not to 135 countries. So what good can come out of this type of analysis?

Marion Amiot

So yes, it's not really bad news. I would say it's more about making those risks tangible. Because we know climate change is happening, but we don't really know well what it means. So also today, we speak a lot about the transition to net zero because that's easier to grasp. Like we know which policies we would need like a carbon price or things like this. But for climate change, we know there will be all this risk, but how much will it cost? It's much more difficult to get a grasp of these things.

So this study was really to understand where those risks are going to happen, and what is the magnitude of the cost that it's likely to be basically. And yes, it's just a scenario, right? At the end of the day, it helps you inform your understanding of these issues. As I said before, there are a lot of uncertainties around the analysis, but it's a good way, I think, to make this problem tangible in the first place.

Nathan Hunt

Beyond decarbonization, what can be done to ameliorate these economic impacts under the different pathways?

Marion Amiot

So obviously, the less warming we will have, the easier it will be for countries to adapt because the risk will come more gradually. But yes, you can think of a few things. So for example, sea level rise. If we look at the Netherlands, we know they have flood defenses in place, so that there is a way to face those risks. Or things like typhoons are very common in Asia Pacific already.

But if you look at Hong Kong or Japan, it's not really impacting the economy that much. So there is a way to make your country stronger to face those risks. But again, I think the issue for many of the vulnerable countries is that they don't necessarily have the financial capacity to do so. So there is probably a need for international support to help those countries which are more vulnerable to face those...

Nathan Hunt

The climate analysis has been getting some bad press lately. And I'm specifically referring to in the United States, where it's considered ideological and different from traditional financial metrics. So just to clarify, is S&P Global using your analysis, this most recent analysis, to recalibrate sovereign credit ratings?

Marion Amiot

So we've always looked at ESG factors within the ratings. I mean, what we are doing now is we're trying to be transparent about those indicators. And in this specific case, it was more of a scenario analysis. So it's to inform our view on those risks, but it's not something that will trigger any downgrades or anything like this because, I mean, we're also looking out to 2050.

So there's a lot that can happen in between. So it wouldn't really be fair to say, based on the scenario, which has a lot of uncertainties around it, we act on this to change our rating. So I would say it's more to inform our thinking and understand what countries may face in the future with regards to climate change.

Nathan Hunt

Marion, I'm going to leave it there for today. Thank you so much for joining me.

Marion Amiot

Thank you for having me here. It was great.

Nathan Hunt

And thank you to all of you for joining us on this Seek & Prosper interview series.