Geopolitical Aftershock: Climate Change and Commodities

Food security and the dangers of a hungry population are a major global risk and geopolitical flashpoint. Corn, rice, soy, coffee, copper, iron, nickel, crude oil, natural gas and propane are just a few of commodities traded in huge Supertanker sizes quantities across the world.

Commodity trading is worth billions a year and is a cornerstone of the global economy, the glue that connects farmers, miners to merchants, industrialists and refiners to consumers.

However, a sobering new report by the Commodity Futures Trading Commission highlighted the fact that financial markets are not recognising the risk that climate change poses to commodity trading. These risks could plunge commodity markets into chaos even if they are recognised.

Millions of people already suffer from food poverty and insecurity in India, Africa and Latin America, but even in the wealthy United States around 10 percent of households suffered food insecurity last year as the country experienced a sharp pandemic sparked recession.

Climate change over the next couple of decades will dry rivers, disrupt traditional weather and weather patterns such as monsoons. A warmer world means more wild fires, drought and sea level rise which will destroy coastal farmland and river deltas.

All this spells bad news for agriculture, climate change will decimate crop yields across the world while population is still predicted to be growing.

The FAO expects the global population to rise by 2 billion and food demand to grow by 60 percent by 2050. But by 2050 without drastic action catastrophic climate change will be ravaging agriculture.  

For example India, Vietnam and Thailand are the world’s premier rice exporters, a major drought in two or three of these places would see a major global rise in the price of rice.

As these effects take hold over the next decade and the realisation that agricultural produce is less secure, there will be a concerted effort to monitor and protect food sources so exports do not mean local people starve.

Food Nationalism

Food nationalism will take hold across the world as populations demand government’s prioritise local food chains. During the pandemic a number of countries put exports controls in place to ensure their own people got fed first. Export clampdown will in turn create further prices swings.

There are many ways which humans will combat these problems, many innovative solutions exist including:

  • Vertical farms growing crops inside away from the vagaries of weather, such Danish venture Nordic Harvest.
  • Growing more climate resilient crops which are better able to withstand heat and drought.
  • Farming and agricultural production could also be boosted through improved technology or by utilising more farmland

However these measures are unlikely to stop the full force of climate change, some crops such as rice and wheat cannot be grown at scale indoors and there is limit to resilience measures and how far crops can be adapted.  

Insecticides and pesticides are already decimating insect populations across the world and much of the world’s land is already severely degraded. Given so much land has already been put under the plough there is a limit to how much more can used.

The trade in metals and minerals are not immune to climate risks. It might appear that mining would be unaffected by climate change, but droughts, extreme weather and extreme heat could all make certain mining operations much more difficult. Mines that rely on regular water supplies could see those dry to a trickle.

Global Supply Chains

Global supply chains which bring these metals from deep inside the earth to be processed and sent onto to manufacturing plants in an intricate series of steps will be under more threat than ever before. Extreme weather events, flooding, greater incidence of disease and growing geopolitical tensions are just a few of the factors which those governing supply chains will be concerned about.

In geopolitical terms fluctuating commodity markets will create major price fluctuations and supply problems will push suppliers to look for more stable sources of commodities.

Crops and agricultural produce will be sourced from new more climatically suitable areas. So the South of England could become a major wine growing region while the Spain and Italy suffer as their crops suffer in excess heat. Innovative companies like Nordic Harvest could be big winners as the world turns to innovate climate friendly solutions.

Coffee Shortages

Countries most exposed to climate change – South Asia and Africa will suffer most acutely will also see the commodities such as coffee, chocolate, rice are likely to be hit hard.  Coffee the drink which powers people’s mornings in every corner of the world is a US$ 70 billion a year industry. Now warmer temperatures are encouraging the fungal diseases which are destroying crops.

Changes in rainfall patterns are also costing coffee growers, too much rain can make the fungal infections worse, too little and the crop will not grow. Adaptation is hard because of the unpredictability of rainfall and heat, if you invest in a drought resistant crop but then experience excessive rainfall and widespread fungal growth any resilience measures will be unhelpful. Right now customers are not feeling any change, but in time they could see prices rises and many varieties wiped out.

Instability and the effect of climate on commodities has not been priced in by global markets which means any correction could be painful and expensive. Investors are increasingly turning to risks assessment like the Task Force for Climate Related Climate Disclosures which attempt to measures a company’s climate risk exposure.

Commodity trader and suppliers will have to pay close attention to climate risks as they disrupt global markets over the next decades.

Taking the Long View: Climate Change and the Military

The new US Defence Secretary Lloyd Austin has declared that climate change would be recognised as a global risk and a major security threat. The contrast with the Trump administration which ignored climate change or actively took measures to make it worse could not be starker. Recognising the problem is the first step to addressing it. Unfortunately, climate change is a major systemic issue which cannot be wished away through policy changes.

Environmental and political groups have long made headlines about climate issues but much less noticed militaries around the world have also been expressing concern and quietly making plans. Climate change is not on its own going to make the world more violent. Instead, it is a threat multiplier, a changing climate will create the conditions that will result in a more dangerous world.

Sea Level Rise

Sea level rise threatens to start destroying many of the world coastal cities in 20 to 30 years time. Thousands of seaside settlements and millions of acres of farmland will be lost to the incoming sea. Migration will start from low level island states in the Pacific. This will be politically explosive as it will effectively mean countries disappearing under the sea and homeless migrants turning up to neighbouring countries.

But the real impact will be felt when megacities like Dhaka, Shanghai and Mumbai start losing their battles with the sea. While some metropolises may try building walls or other defences, ultimately the sea will be unstoppable.

This process is already underway in Jakarta. The wealthy and governments will flee inland or go the new capital planned for the neighbouring island of Borneo leaving the poor to suffer in decaying, drowning cities. The chaos and mass movement of people will cause conflict as people try move to different regions of their homeland or to cross borders in huge numbers creating social upheaval on terrifying scale.

Tensions will flare between newcomers and existing residents, rich and poor. To make matters worse tropical storms and extreme weather will increase in strength creating more disasters which will make living in coastal cities even more undesirable.

Military Installations

Military installations such as naval bases are also vulnerable to rising sea levels and extreme weather. These factors can overcome infrastructure built for different era. It will not have escaped the US Military Command’s attention that a wealthy well developed part of the country, Texas, was devastated by cold weather and snow. The Lone Star State ground to a halt in February 2021 with many losing power and water as result around 80 people died.

The US military has been trying to find ways to cut down on its massive fossil fuel consumption. More use of renewable energy and greater efficiency will cut the bill and reduce carbon emissions and cut energy bills.

Militaries around the world constantly develop scenarios which may occur and test their response. Most obviously this would be war with a rival, but militaries have to respond to many different situations.

All Hell Breaks Loose

One Scenario the Pentagon have imagined is the “All Hell Breaks Loose” where other countries are torn apart by conflict and extreme weather creating overlapping and never-ending disasters. At the same time the military are dealing with trying to provide relief efforts at home.

The US military’s own installations could be at risk. Naval bases are threatened by sea level rises and more frequent storms will mean installations have to be evacuated.

Competition for scarce resources such as water and food are also likely to cause conflict particularly in poorer countries and those with limited resources or that are already experiencing conflict. Covid has squeezed the price of food which has shot up along with many other commodities recently.

Prices will likely fall as the world eventually returns to normal. However, this could take a few years as the world readjusts after Covid which gives plenty of time for unrest or revolution to be encouraged by a hungry fed up population suddenly released from the bonds of Covid isolation. Some analysts linked the Arab Spring to dramatic food prices rises, while this may be simplistic, empty stomachs are a potent reminder of the poor governance and inequities suffered by many.

Food Security and Ethiopia

Covid disruption is one factor then the effects of climate change truly hit home the impacts will be much harsher. Rising temperatures in Africa and the Indian Sub-Continent are likely to reak havoc on agriculture.

Food security are already major concerns in these regions, climate change will make it far, far worse. For example coffee production in Ethiopia and maize growing in Mozambique could be disrupted by 2030 seeing a drop in yields from anywhere between 10 to 25 percent.

The widespread failure of crops will result in food shortages and famines but likely result in export bans which will cause food prices to shoot up across the world. This instability and chaos will put pressure on militaries who might be forced into action to try and stop large scale migrations, act as a humanitarian forces and intervening in conflicts.

Water Wars

As resources such as food and water become scarce, the potential for conflict increases. Egypt and Ethiopia recently came close to war over a dam the Ethiopians were building which threatened to cut the flow of water to the Nile.

Pakistan, India and China face potential conflict over the headwaters of the many rivers which flow from the “third pole” the Himalayas. When disappearing glaciers threaten the flow of the Brahmaputra, Ganges or Indus tensions between the countries facing existential threat could explode into war.

Militaries around the world are waking up to the reality of climate change and threats it poses. While they will not be the biggest advocates for change or mitigation around climate change they could be a group that effectively highlights the risks that a changing climate poses.

Climate Risk: A New Frontier for the Corporate Sector

For millennia climatic factors have threatened humans. Farmers have been at the mercy of droughts, storms and floods. Harsh climates such as rainforests, deserts and tundra have shaped human development forcing people to move or adapt.

The modern world appeared to offer some deliverance from harsh climatic conditions. People can build huge cities in the desert or snow thanks to central heating, air conditioning and modern technology. Infrastructure can now be built to withstand extreme weather and technology such as early warning systems can effectively assist in managing disasters.

But now the steady but certain onset of climate change has changed these old assumptions. The world’s rapidly changing climate throws up a host of new risks and uncertainties. Climate change can be understood as a giant lens, which magnifies existing risks making them more frequent and more deadly.

Hurricanes have always posed a threat to humans, climate change will make them stronger and more regular.  The deadly effects of droughts have been around for millennia, but climate change and overuse of water supplies is already shrinking places like Lake Chad, the Aral Sea and many other lakes and rivers.

Rising sea levels will drown mega cities like Jakarta, Mumbai and Shanghai. Despite billions being spent on sea defences, the sea will eventually simply overwhelm urban areas, forcing people inland. The destruction of so much infrastructure will dwarf previous economic losses.

Climate risk is the impact of the environment on humans. For many years we have been concerned with our impact on the environment and infrastructure, pollution and all the other activities of humans will damage the environment. The world’s fast changing climate over the next few decades will make profound changes to our existence.

Climate Risks

  • Higher sea levels as ice sheets melt and oceans warm.
  • Stronger and more frequent cyclones, typhoons, and extreme weather.
  • Drought and famine, higher temperatures & lack of rain will result in mass crops failure.
  • More deadly wildfires, with higher temperatures and drier weather this provides the conditions for fire.
  • Flooding, this seems to be in contradiction with drought, but more unpredictable and sudden heavy rainfall is likely, creating the conditions for devastating floods.

Organisations must now face up to climate change and act to preserve the planet as well as their themselves.

Below I explain climate risk and how it will impact businesses and organisations. I look at how the Task for Climate related Financial Disclosures (TFCD) framework can help banks and other organisations identify how they will be hit by climates risk.

Topping the Global Risk Charts

Authoritative think tanks such as the World Economic Forum placed climate related risks in the top four places of the top ten risks in their landmark 2021 global risk report.

Extreme weather, failure on climate action, natural disaster and biodiversity loss were selected by respondents as the key long-term risks facing the world.

For both businesses and individual’s climate change is often viewed a slow burn threat that always appears to be in the future and that will happen to someone else. Some detractors claim that organisations will be able to adapt to the new conditions.

Companies that fail to act on climate change will face a major backlash from investors, the public and consumers.

Firm’s emissions and supply chains will be identified in close detail for risk. Labels that detail the carbon footprint of products like food labels measure sugar and fat could become a feature of new products.

Companies still require consistent, reliable data on climate risk to finance climate resilient projects and to price climate risks correctly. There are also opportunities for firms that act to identify climate risks. These firms can gain advantages over rivals and pre-empt many threats and even offer products and services for a decarbonising world which faces huge unprecedented threats.

How Climate Risks will materialise

Shrinking ice sheets in the Arctic, Antarctica and the “third pole” the Himalayas where glaciers are melting. Shrinking glaciers in the Himalayas endanger the two billion people that rely on the glacier fed rivers. The melt of the glaciers will reduce the flow of the rivers cutting available water for agriculture and for dams.

The result will be a crash in agricultural productivity and in heavily agricultural economies like India and Bangladesh, as well as much of sub-Saharan Africa this will lead to widespread social unrest, migration and political anger.

The shrinking of ice sheets in the poles will feed sea level rises. Many of the world’s mega cities have exploded in size but will with little thought or preparation towards changes in sea levels.

Shanghai, Karachi, Dhaka, Miami are just a few of many cities threatened by rising seas. Jakarta the already sinking into the sea and the Indonesian government are looking at moving the nation’s capital to a new purpose-built city.

The Risk Multiplier

None of these risks are new, humans have dealt with them for millennia, but climate is best viewed as risk multiplier. It will increase the number and size of these climatic risks.

How far and fast climate risk will impact us is partly down to how fast humans can stop carbon emissions and therefore runaway climate change. Right now, there are signs that mitigation efforts or decarbonisation are taking hold.

Renewable energy continues to fall in cost and investment in the sector continues to grow. But the oil and gas sector’s hold over the energy sector is strong and modern economies remain wedded to oil, at least for now.

The increase in global temperature appears to be minor, ranging between 1.5 C to 4 C. However, it is important to consider this is an average and many critical areas (such as the Antarctica) warming much faster than the average. Even small temperature changes can lead to a catastrophic impact.

The effects of climate risk can be non-linear, so a 1 C temperature increase may reduce crop yields by 5%, but a further 1 C increase in temperature may see a dramatic fall in yields.

However, there are other emitters of greenhouse gases such as agriculture (particularly cows), deforestation and transport. It will take major political change and technological advancement to decarbonise these sectors.

Even if carbon emissions stop or peak now, we will all face unprecedented climate change and all the devastation that goes with that. The longer carbon emissions continue, the worse the risks we will face.

How Should Companies Act?

For companies it means two things: First they need to do more to reduce their own emissions which is the central plank of the 2015 Paris Agreement. Reducing emissions will mitigate climate change slowing the rate at which climate changes.

Secondly: Organisations need to consider their own exposure to climate change. The impacts described above will affect entire societies but will also hit companies and organisations in a variety of different ways.

Climate risk is fast growing discipline. The Intergovernmental Panel on Climate Change (IPCC) outlined many of the climate risks faced by world in various reports.

The Task Force on Climate Related Financial Risks (TCFD) was created in 2017 to create a framework for banks to assess the climate risks they face. Above all the TCFD was set up to make banks realise that climate is a financial risk. Companies and banks could lose billions if they fail to take climate risks seriously.

For manufacturers considering their investments, existing factories will be emitting carbon in 10, 20, or 30 years’ time, Decisions need to made now to cut emissions or companies will be left with outdated infrastructure designed for a fossil fuel world.

Planning new investments and projects should be viewed in the context of changing climate. When water shortages, desertification and sea levels rise become the norm, companies need to adapt to this reality. Within a decade all major companies will report on climate risks.

Climate risk will intensify and compound existing threats and twisting them into tangible threats. Climate risk can broadly split into two areas: Physical climate risk and transition risk.

What are the Hurdles?

Climate risk is making waves in the corporate sector leading firms scour their portfolios for climate related risk. It has taken a time for organisations to understand, accept and implement the principles.

For many businesses’ climate risks are too far in the future, are too uncertain, others many feel they can mitigate against the risks. For most businesses planning 2,3 or 4 years ahead is the norm.

Beyond that time frame risks become too abstract and difficult to predict. Companies are often dealing with a raft of urgent issues so the problem of climate change can seem distant and unimportant.

Applying the TCFD

How can my firm discover its climate risks ?

Financial organisations can apply the TCFD principles, in practice this is difficult, given it is such a new set of principles in a new area of risk. But over time its application will become easier as firms become more experienced and skilled at applying the principles.

How does the TFCD work?  

The TCFD was driven by Mike Bloomberg, founder of the financial information firm and ex-Mayor of New York.  The framework is a set of recommendations and principles which will allow organisations to understand and measure the concentrations of carbon related assets in portfolios and the financial sectors exposure to climate risks.

Many banks and financial institutions have signed up to the principles. However, it is not yet clear how it will work in practice. Whether there will be a unified approach and standardisation or will organisation diverge and use their own approaches.

The TCFD process includes a disclosure of climate related risks. They should be adoptable by all financial organisations, which will provide useful forward-looking information, will focus on the risks and opportunities related to a low carbon economy and that recommendations should have a financial impact.

There are four pillars:

Governance

Disclosures around climate related risks including the role of management and the board.

Strategy

This should disclose the actual and potential impact of climate related risk and opportunity. Describe the impact on climate risk on the organisation’s strategy, financial planning and overall resilience.

Risk Management

This should identify the organisation’s processes for identifying and assessing climate related risks. It should also describe how these are integrated into overall risk management.

Metrics and Targets

This should disclose the metrics used by the organisation to measure climate risk. Disclose scope 1,2 and 3 greenhouse emissions and describe the targets used to manage climate risks as performance against these targets.

Scenario Planning

The TCFD also recommends scenario analysis, this provides the “what if” analysis which can help a firm tease out what might happen in a significantly warmer world, or one where there is rapid transition. Scenarios are not predictions, but rather a plausible narrative of what might realistically occur.

Physical Climate Risk

Climate change is predicted to result in more extreme weather, rain, typhoons, as well as longer term conditions such drought, flooding and sea level rise. None of these things are new, but what will change is the intensity of impact.

The devastation caused by these changes will result in political instability, economic damage and migration as people move in search of better conditions. This can be internally or across borders. Although poorer less resilient countries will be hit harder, more developed cities such as Shanghai, New York and Hong Kong will be under threat from sea level rise.

Water stress could spark conflict in places such as North Africa and Iraq. As droughts and water shortages become more common, problems with food supply and production will result.

Drought, water shortages and crop failures are as old as time, but the speed at which they happen will be shocking. Mass migration started by long term collapse of countries especially in the Middle East, Africa and South Asia will send millions of people in search of food.

Physical climate risks can be divided into two types, acute and chronic:

Acute physical climate risks:

  • Extreme heat/heatwave
  • Flood
  • Drought

Chronic Risks

  • Higher long term temperatures
  • Lower rainfall
  • Drier climate

Some examples of physical climate risks impact on businesses:

  • Supply chain interruption and damage from extreme weather
  • Higher insurance costs due to high risk of assets being damaged
  • The recommendations should lead companies to be able to identify what assets in their portfolio are threatened by climate risks. For example:
  • A power plant which relies on rivers and streams for cooling may find that if the river dries up and the average temperature rises the cooling system does not work and the factory is untenable.  
  • Rising sea levels will mean many ports are unusable as the ocean engulfs the infrastructure due to rising sea levels, any new infrastructure should take this into account.
  • For an agribusiness reliant on food products, more frequent droughts will reduce crop yields making the business less profitable.
  • Along with physical climate risk there so called second order impacts meaning that one impact will result in further often unpredictable events and impacts:

Some examples of second order impacts:

  • Droughts and famines will result in millions of migrants as marginal land in hot countries becomes arid wasteland.
  • Many coastal towns, cities and communities become untenable due to sea level rise and flooding (Florida & Jakarta for example).
  • Poorer more vulnerable communities/countries will be hit hardest as they have fewer resources, and less ability to adapt to a changing climate.
  • Ecosystem collapse which will result in fish or food supply failure.
  • Communities in hurricane zones are devastated with ever more frequency making their existence untenable.
  • Crop failures due to a failure of rains, excess heat or even pests (able to breed faster due to increased temperatures) could result in shifts in the food chain, food price increases for some and starvation for others.
  • Epidemics – rising temperatures will make it easier for disease to spread, making the spread of viruses and diseases more likely.

Transition Risk

Transition risk is the threat that policy shifts around climate change will result in losses for companies and banks. As economies decarbonise to mitigate against climate change, what is the risk to your firm. Germany closing its coal plants is a transition risk for the owners of the coal plant.

In oil dependent countries like Saudi Arabia the risk is probably lower as the government will stick with fossil fuels for longer. But energy is not the only sector at risk, changes in technology are also a factor.

The move from petrol cars to electric will see many car companies change production models. However, not all will be successful and doubtless go bankrupt. This shift is already visible, Tesla which makes exclusively electric vehicles is the world’s most valuable car manufacturer by market capitalisation.

Other disruptions could be the move towards vegan diets which is already threatening meat processors and farmers. Other shifts driven by social change could be tricky to predict but could include a widespread boycott against flying or at least people cutting back on flying (the covid pandemic could accelerate this by making remote meetings the norm).

Somee examples of transition risk are:

  • Early write of equipment due to policy changes
  • Increased compliance costs due changes in law and policy
  • Falling demand for carbon intensive products
  • Increasing costs due to rising input prices in water, fuel and other raw materials

Disorderly Transition

Transition can be orderly or disorderly. An orderly transition is a well-planned decarbonisation of the economy with the broad backing of society, government, and the private sector. Germany is a good example, the government has steadily shifted its power production towards renewable energy.

Disorderly transitions will be seen where countries that have stuck with fossil fuel dependent economies.The country is then faced with a need to decarbonise very quickly to meet obligations under the Paris Agreement, national legislation, or peer pressure from other countries.

This could well translate into geopolitical risk as sectors of the economy such as coal mining are threatened and unable to adapt, they collapse resulting in energy shortages.  

Geopolitical Risk and disorderly transition

Countries that fail to meet decarbonisation objectives will be put under pressure by those countries that have achieved their goals. As climate risks intensify, the political pressure on the worse greenhouse gas emitters will grow. Naturally a blame game will emerge where developing countries will accuse developed ones of carbon debts and hypocrisy.

This could escalate as the carbon sinners; countries that continue with deforestation or expanding fossil fuels use and those who have decarbonised. As climate risks engulf the globe the pressure on sinners will become acute.

Already politicians and others launch political attacks on Bolsonaro and Trump due to their lack of environmental credentials. While Trump could afford to largely ignore them, Brazil faces its trade deal with the EU being derailed thanks to disregard of the environment.  

Climate Risk Analysis

Climate risk means each organisation will analyse their assets for physical and transition risks. This can be a time consuming process using climate models or policy analysis to identify risks, but also taking into account time scales and the criticality of asset locations. Assets with a short tenor do not pose so much of a risk, whereas those with a 20-year life span are far more likely to be impacted.

Locations such as distribution hubs or HQs are likely more critical to companies’ operations than a small branch office. Therefore these key locations should be analysed for climate risk ahead of less critical locations.

Eventually organisations should analyse their assets for exposure of both physical and transition risk and quantify that in their financial statements. For many this will involve a painful and frank analysis of their company. For those will heavy exposure to climate risks – this could involve major losses or at least a reduction in the value of the firm.

The key objective of the TCFD is to ensure that banks avoid investing in assets with climate risk.

The TCFD outlines some key principles for effective disclosures.

Principles for Effective Disclosures

1 Disclosures should represent relevant information.

2 Disclosures should be specific and complete.

3 Disclosures should be clear, balanced, and understandable.

4 Disclosures should be consistent over time.

5 Disclosures should be comparable among companies within a sector, industry, or portfolio.

6 Disclosures should be reliable, verifiable, and objective.

7 Disclosures should be provided on a timely basis.

Climate Opportunities

Climate risk is a significant risk for companies and the analysis should consider and mitigate against these risks. For the most resilient and nimble firms there will be opportunities.

Adaptation measures

Some countries and regions may see benefits, such as wine growers in the South of England to Russian farmers who may enjoy longer warmer growing seasons. While overall the risks of climate change will outweigh the benefits, there will be advantages for some.

Resource efficiency

By reducing the amount of material or energy used in production and distribution processes companies can save a great deal of money, as well as curb emissions. Innovative ideas such as using electric vehicles, retrofitting buildings, embedding circular economy ideas, introducing LED lighting can all assist the transition to a low carbon future.

Products and Services

By offering low carbon products and services companies can enhance their competitive position against rivals. Any product that reduces emissions whether this is because of local production, low energy consumption or reduced materials has the potential to be attractive to consumers who increasingly favour goods that do not damage the environment.

Decline and Fall: The Geopolitics of Climate Breakdown

8000 years ago the Sahara region was far greener and wetter, supporting a sizeable population of hunter gatherers and large animals. Over time the region became more arid and prospects dimmed for the people that roamed an increasingly dry interior.

These nomads moved to the coast in search of more fertile land and in particular the mighty Nile river to the East. This migration eventually led to intensive population settlement around the Nile, which in turn led to the rise of the Egyptian civilisation.

Humans have always moved to adapt to climate change. However the speed of change in the Anthropocene and the huge scale and complexity of the civilisations humans have built. Adapting to this new reality over the next decade to this new world could be the biggest challenge humans have ever faced.

A Fast Warming World

As the world’s climate changes at an unprecedented rate the effects are becoming obvious at just 1 C warmer. At 1.5 C the impact will be far reaching and undeniable. Each increase in temperature will bring more disruption, conflict, and disorder. Change will not happen in linear motion. A 2 C increase is not twice as bad as 1 C increase, it is far, far worse. The world is destined to be hotter and more prone to disasters such as mass forest fires, floods, crop failures and deadly heatwaves.

These disasters will spur mass migration due to sinking cities and dying farmland. In turn this will stimulate anger among people affected by these disasters. One positive response will be a dash towards renewable energy and serious attempts to decarbonise the economy.

Climate resilience measures such as new heat resistant crops, sea defences and sustainable infrastructure will become essential. All of this implies huge and unpredictable change for humans.

Scenarios for Climate Geopolitics

Climate breakdown will also have a major impact on international politics as countries grapple with rapid change. Water shortages, heat waves, sea level rise and extreme weathers (and all the other negative impacts) will hit developing countries the hardest, but every part of the globe will be affected. No where is yet adequately prepared.

Climate change is the ultimate threat multiplier and as the risks unfold many will take on a geopolitical dynamic. Below I look at eight different geopolitical scenarios the world could face. These are not predictions but rather sketches of how the geopolitical landscape could play out over the next decades.

Climate Breakdown Magnifies Conflict

The long running war in Syria has been often linked to climate change. Drought linked to climate change in Syria caused thousands of farmers to flock to cities in search of a better life. Overcrowded cities and unhappy famers helped created the conditions for widespread protests which in turn sparked civil war.

Climate change has also been linked to the Darfur conflict. Pastoralists in the Darfur region were forced to move due to get access to fresh water but this brought them into conflict with local farmers. The clashes eventually led to a deadly war characterised by massacres and ethnic cleansing.  

Climate change does not cause war, nor does climate change create hurricanes. What it does do is magnify risk making disaster more likely. A hotter world this less fresh water, arable land, fewer resources and more angry people, all of which creates the ideal conditions for conflict.

Mass Migration

Mass crop failures, receding fresh water, cities slowly sinking into the sea will spark widespread migration. Many people will move to other parts of their own country. Others will look overseas and inevitably people will choose or be forced to flee across borders sparking political and social reactions. Climate migrants may find much sympathy across the globe and may be welcomed into their new homes.

However, all too often across the world migrants are demonised. The size and scale of climate migration could dwarf previous waves of migration. The Syrian war set off a wave of migrants into Turkey and Europe with major political consequences.

Many European politicians and voters were unhappy with the prospect of large scale migration and tried to stop or discourage Syrians from moving. The desertification of the Sahel region could see millions upon millions of desperate people unable to farm or find work and look north to Europe for salvation. There will be heavy political price seeing millions of migrants enter Europe or watching them face destitution and famine at home.

These scenes will be recreated across the globe as retreating glaciers and shrinking water will put huge pressure on agriculture across the world. As ice melts for good the mass failure of farms and crops will follow. The result will be rocketing food prices, mass migration and political chaos.

The Rich and the Poor

Countries will start blaming each other as the worst effects of climate change take hold across the world. Developing countries will condemn developed nations for over consumption and years of climate emissions. Developed nations will blame each other for not doing more to reduce emissions earlier.

Global crop failures will cause famine in developing countries and fast rising food prices in developed countries. A loss in living standards will mean political upheavals as people take out their anger against the government. Crop losses can be partly mitigated by using adapted crops and by changing crop type as well as perhaps technological fixes such as growing meat in labs.

Richer nations have more resources for adaptation and resilience measures. They will be able to build sea walls, resilient infrastructure and rebuild faster after disasters.

The developing world has been struggling to catch up with the living standards of the west for decades. But the capacity of many African and Asian countries is limited in terms of disaster recovery. They lack the resources and capability to rebuild as effectively as western nations.

Economic Collapse and Political Chaos

Economic growth is one of the central tenets of capitalism. An objective to be pursued at any cost. But the economic devastation caused by climate change will reverse many of these gains. Instead of economic growth countries will experience a collapse in usual economic activity as a hostile climate makes our current life unsustainable.

The Covid crisis is a chilling foreshadow of the future. Lack of economic growth will see faith in capitalism shaken and perhaps the emergence or re-emergence of new strains of political thought arise. Socialist, green, as well far right and fascist parties will see their popularity flourish as the disillusioned look for answers.

While northerly countries such as Canada and Russia enjoy enhanced agricultural benefits others will suffer immensely. The World Bank estimate for India sees its economy shrink by a quarter thanks to climate change. India’s recent burst of prosperity will be reversed as productivity collapses. As crops dry, rivers shrink, monsoons arrive will late and heat waves kill people by the thousands. The foundations of the current world economy will rot away.

Ultimately any economy is dependent on “natural capital” such as clean water and air, fertile soil and agricultural yields. The warmer the earth becomes the possibility of multi-breadbasket collapses increases.

A New Era of Isolationism

Recessions and economic collapse could usher a new period of isolationism as countries retreat inwards focusing on trying to feed and placate their own angry populace. Infrastructure designed for our current world will be unable to cope with new rapidly changing conditions.

When the monsoon arrived late in India in 2016, farmers overwhelmed the electrical grid to meet irrigation needs, shutting power down across much of country. The 2020 monsoon is expected to be the 3rd year in a row which is late.

Financial markets will react to climate risk too late. Bankers and insurers will realise that the much of the real estate that underpins the global economy will be worthless in a couple of decades. This could cause an unprecedented global financial market crash as assets are radically revalued downwards.

Disorderly Transition

As the reality of climate change hits home a transition to renewables and decarbonisation will accelerate. Countries that have tried to ignore the rush to decarbonise could be left behind or face an energy crisis as they attempt to lurch to renewables or are forced to through regulation. This shift will profoundly change the geopolitical map.

The transition to renewables will become unstoppable and the oil and gas giants will see their dominance collapse. Fossil states such as Saudi Arabia may panic in the face of falling solar and wind energy prices. Some may pivot to renewable energy. The Gulf economies are in a strong position to utilise solar power given their abundant sunlight and empty desert spaces.

New “electro” states may emerge to capitalise on their dominance in green technology. Using their advantages in clean energy to dominate battery, solar or wind technology or to sell renewable energy to others. Australia for example plans to export solar energy to Singapore.

China is the world’s worst carbon emitter but has become a leader in developing new technologies such as solar panels and electric batteries. However, there is far less geopolitical leverage in supplying solar energy compared to oil. It should be much easier for countries to become self-sufficient in energy which could reduce the geopolitical tensions that have characterised the oil age.

Petro States and Electro States

Fossil fuels have defined the modern economy, underpinning the massive economic expansion of the last two centuries. Before widespread coal and oil use humans had to largely rely on horse, water wheels, animal oils and their own hands to produce energy.

The current global energy mix remains focused on coal, oil and gas. The main oil producers are Russia, US and Saudi Arabia. Russia has shifted much of its focus to supplying China. The US has undergone a domestic oil boom which has allowed it to become self-sufficient in oil.

Saudi Arabia remains the key swing producer able to increase or decrease oil production in order to shift prices sharply. It is not surprise that these three states have been the most active in delaying greenhouse gas emissions treaties or in the case of the US pulling out of the landmark Paris Agreement.

The Middle East sits on top of much of the world’s easy to drill oil. This fact makes it much more tempting for outside powers to interfere and meddle. The prize is influence and control over the region which controls much of the world’s most important commodity as well as holding a key geopolitical position between Europe, Asia and Africa. Without oil the Middle East is unlikely to transform into a peaceful utopia. But if demand for oil fell rapidly it would release some of the geopolitical tension that envelopes the region.

As oil demand dwindles petrostates will be left fighting for market share. While investment in oil and gas may collapse as investors shun a declining industry. But as marginal producers and countries with high production costs like Venezuela move away from oil. In turn this may increase market share for Gulf States who can usually produce oil cheaply and who still have easy to recover reserves.

While some petrostates may pump oil for longer than expected, eventually their geopolitical influence will wane. A decarbonised world will hand power to those places best able to utilise renewable energy and take it from the old fossil powers.

The Age of Disaster

Disasters such as flooding, typhoons and storms will increase in number making previously inhabited areas barren and unlivable as the cost of insuring, rebuilding and recovering from disasters becomes too costly.

Increasing number of wildfires across the world will destroy forests and housing, heatwaves will become a major source of death and reduced productivity.

Despite freshwater sources drying up, flooding could increase in severity due to the increasing intensity of weather patterns. Rainfall is lower overall but falls in a short space of time, this combined with deforestation and increased use of floodplains for housing creates the receipe for more deadly floods.

The good news is that humans have become more adaptable to disasters. Early warning systems, well coordinated recovery efforts and infrastructure which is designed to withstand extreme conditions means that many lives and homes can be saved.

However increasing intensity of disasters will push this resilience to the limit in many parts of the world. If disaster only strikes once a decade that gives ample time to rebuild. If major typhoons, floods and wildfires become a yearly occurrence it becomes much more difficult and expensive to rebuild. People could be driven from their traditional homes resulting in widespread migration as well as anger which could morph into political change and economic chaos.

The Technology Race Heats Up

As the realities of climate change bite countries, companies and other organisations will accelerate and improve the solutions to climate breakdown. Many of these solutions exist, solar panels, wind turbines, curbing deforestation and planting more trees and energy efficiency measures.

Countries that were used to growing plentiful crops could be forced to import as domestic supplies wilt and die.  This will push up food prices, but also create innovative solutions such as widespread lab grown meat and intensive urban farming. Urban farming grows vegetables in a nutrient water often using unconventional buildings such as high rises.

China controls the lion’s share of the global solar panel industry and the supply of rare earth metals which provide the key ingredients of modern batteries. As the world moves to decarbonise, market share and expertise in these sectors will become increasingly significant.

Becoming a leader in an emerging green technology will become a major advantage as demand surges for these products and ideas. Other technologies around negative emission technologies are still being developed. Carbon capture promises to extract carbon from the atmosphere potentially solving the problem climate change.

But carbon capture has not yet been done at scale and so remains a speculative solution. Lab grown meat as a solution to carbon emitting meat sector also has promise. But again this has not been widely adopted. The next decade could see a battle emerge between corporations and countries to lead and dominate in these new technologies that promise to solve the climate emergency.

Climate Chaos

The scenarios are just that, not predictions, no one has a crystal ball. Climate risks will not appear neatly as planned and predicted. Many factors including the will of humans to mitigate and adapt to new circumstances and flight climate change will change the likelihood of these scenarios.

Similarly, government actions may shape new unexpected geopolitical maps. Climate breakdown may usher in a chaotic global order or a new era of international cooperation.

After the Storm: Long term risks in the aftermath of Covid-19

In July Intelligent Risk, a publication of the Professional Risk Managers’ International Association (PRMIA) published my article on long term risk to the world economy following Covid-19.

In March 2020, millions of office workers around the globe packed up their desks and almost overnight became remote workers. They left behind daily train journeys, coffees with colleagues and crowded meetings for a new world of virtual meetings, makeshift home offices, and juggled teaching with emails.

Now many firms are struggling to survive an unavoidable global recession. However, they also need to react now to the longer-term risks facing the economy.

  • Covid-19 will act like a fast-forward button, accelerating long terms trends such a shift to home working, rising economic nationalism and corporate sustainability.
  • Long-term structural shifts in the economy will permanently reduce demand for many sectors. New working and social patterns will threaten sectors such as airlines, entertainment, restaurants, and international tourism.
  • Shocks like Covid-19 create recession, mass unemployment and most likely major political aftershocks. However, shocks also trigger innovation, ingenuity, and new opportunities.

Globalization Under Fire

Globalization was already under threat from nationalism and trade wars like the US-China disputes. When Covid-19 first appeared in Wuhan at end of 2019, the main concern in the West was around disruption to supply chains that originated in China. Companies dependent on supplies from China faced and experienced shortages of pharmaceuticals, PPE, and many other goods.

These problems may ease soon. However, long-term firms may seek to make their supply chains more resilient. This could mean more “inshoring”, shortening and simplifying these often complex, opaque chains. Economic nationalism or economic independence may also see barriers raised to prevent shortages of critical medical supplies or the supply of goods deemed strategic or valuable such as rare minerals, oil, and food.

A new world means new opportunities and markets. Tech companies that provide work from home services like video chat should have a bright future, as should domestic tourism in a world scared to fly and online delivery services. Zoom a digital communications firm specialising in video meetings had 10 million daily meeting participants in December 2019. In April 2020, just four months later, Zoom counted more than 300 million daily meeting participants.

Less obvious niches like drive in cinemas could also enjoy a boom. The collapse and retreat of many firms due to Covid-19 will result in a wave of consolidation and restructuring. The successful firms of the future will be those that prove resilient now.

Covid-19 and Climate Change

The prospect of economies in ruins, unprecedented recession, and mass unemployment will prompt many to assume that action on climate change is no longer a priority. However, a Covid-19 recession is a stark reminder of how nature can deliver a deadly shock. Covid-19 is a dress rehearsal of how climate risks may soon affect society.

Disruption is a harbinger of change. Deep recession is the time and opportunity to remodel the economy on sustainable lines. This means building back better, sustainably. Kristalina Georgieva Managing Director of the IMF commented: “If this recovery is to be sustainable – if our world is to become more resilient – we must do everything in our power to promote a green recovery”.

Governments and Firms can build on policies already in place:

  • Invest in green resilient infrastructure that can cope with a changing planet. The world will experience more heat waves, sea level rise and extreme weather as climate change becomes more intense.
  • Mandate measures like the Task force for Climate Related Financial Disclosures (TCFD) reporting which identifies climate risks in Bank’s portfolios. Canada launched the Large Employer Emergency Financing Facility (LEEFF) designed to support employment during a Covid recession. Any firms receiving funding with have to publish climate related disclosures (TCFD).
  • Use renewable energy sources to help mitigate climate change.
  • Encourage green infrastructure: cycle paths, electric vehicle charge points, and a faster broadband to make it easier to work from home
  • New stimulus packages combined with a restructured economy could be the impetus for a more sustainable economy. The world will look closely for green credentials in China’s forthcoming economic recovery package. The EU is pushing ahead with its EU Green New Deal in conjunction with its Covid-19 emergency response package.

The Long-Term Risks for a “Brown” Recovery

A “brown” recovery is one based upon traditional energy sources such as oil and coal. These energy sources feed resource intensive sectors such as cement and heavy industry these activities magnify climate risks through greenhouse gas emissions. A world of more extreme weather events, deadly heatwaves and sea level rise will disrupt economies in way that dwarves the current crisis.

Companies that are not reducing emissions may be penalised by governments or consumers. France has made reduction in emissions and domestic flights a condition of its bailout of Air France. Consumers could increasingly shun firms that are not acting responsibly on reducing emissions or taking sustainability seriously.