World ‘unprepared’ for magnitude of cascading climate risks
Environmental Risk Outlook 2022
by Will Nichols and Dr Richard Hewston,
Civil unrest, political instability, food insecurity, mass migration and worsening human rights are the baked-in secondary impacts of climate change, but you wouldn’t know that from the undercooked approach of governments and business. As the extreme weather events the world is already experiencing become more frequent, they will trigger a cascade of these second-order climate risks across a huge swathe of countries.
And it’s not just the usual suspects to look out for. Africa and Asia’s developing economies will undeniably bear the brunt, and the developed world will have to respond as these issues press increasingly on their borders. But, according to our new research assessing the susceptibility of countries to cascading risks, economically and geopolitically strategic nations such as Brazil, Mexico, Vietnam and Russia are also in a dangerous position. Even China could find itself under pressure if change continues to accelerate. If countries like these succumb to extreme bouts of climate-induced instability, the knock-on impacts could overwhelm economies and populations across the globe.
Organisations and governments are beginning to create extensive mitigation plans for physical climate threats, yet the low levels of investment in looking at the secondary risks show that most are almost entirely unprepared to deal with the wider political, economic and developmental impacts of a warming planet. And as the intensity of heatwaves, storms and floods speeds up, so do the time horizons for rising global instability.
Identifying where these impacts will become most prevalent – and which countries are most at risk – is vital in managing cascading threats for organisations aiming to reinforce their long-term resilience and for governments looking at external factors threatening their own interests.
Assessing the threat of second-order climate risks
To measure the wide-ranging threats from cascading risks we turned to our portfolio of risk indices and a statistical method called cluster analysis to assess the performance of 196 countries across 32 structural and dynamic issues. The resultant Cascading Climate Risk Resilience Model (CCRRM) includes a broad spectrum of interconnected factors, such as physical exposure to weather-related events, political stability, economic power, resource security, civil unrest, poverty, the human rights situation, conflict, and strength of infrastructure – all of which are crucial to a country’s resilience.
Think about each one of these factors as a block in a dam: the more blocks a country has in place, the stronger the protection it creates for its society. But if the blocks become fragile, broken, or crumble entirely, the whole structure is undermined, magnifying the potential for cascading climate risks to break through and flood a country with destabilising impacts.
Determining the shared characteristics and differences between countries across five groupings of indicators – climate change vulnerability, economic development, health, political risk and social issues – enables us to identify which are best placed to avoid cascading climate risks. What the data shows is that the world is split into three near-even groups we’ve termed ‘insulated’, ‘precarious’, and ‘vulnerable’ (see figure 3).
It is no surprise to see that our ‘insulated’ group predominantly includes the world’s wealthier countries, while the ‘vulnerable’ group is broadly characterised by those with lower incomes.
The most ’insulated’ nations, like the US, Japan or the UK, balance out climate threats through strong governance, low levels of conflict, robust social policies, and their ability to provide sufficient food and comparatively high-quality infrastructure. ‘Vulnerable’ countries lack these safeguards. Some, like Mali, Syria, and Venezuela, are already hotspots for climate-driven migration and conflict. Others, including the major emerging markets of India, Indonesia, South Africa and Turkey, lack the safeguards needed to protect their societies as the threat of cascading risks multiply, putting not only their domestic economies at risk, but also threatening to upend supply chains stretching across the globe.
Neither the ‘insulated’ or ‘vulnerable’ groups’ exposure levels to secondary-level climate risks are likely to change significantly. That said, cascading impacts are not limited by political boundaries and so a current ‘insulated’ nation might find itself dealing with the knock-on impacts of a crisis in a neighbouring ‘vulnerable’ country that spurs mass migration, for example.
However, it is the countries that reside in the ‘precarious’ middle group, including Brazil, Mexico, Russia, Saudi Arabia and Vietnam, where the metaphorical dam has fractures that could weaken their overall structural strength and ultimately their ability to respond to large-scale emerging threats.
As shown below, ‘precarious’ countries’ average exposure to climate risk is closer to that of ‘vulnerable’ countries than their ‘insulated’ counterparts. While they share some of the safeguards seen in ‘insulated’ countries, these protections are often less robust. Small shifts in these categories could easily see these ‘precarious’ countries tumble into the ‘vulnerable’ group – hence their name – increasing the threat of cascading climate risks affecting the populations, investments, business operations, and supply chains located there. Companies able to predict where climate-related instability will occur will be better equipped to protect investments, bring in mitigation measures or even switch suppliers, avoiding costly disruption or reputational issues.
The graphic below shows the 15 ‘precarious’ countries that share the highest percentage of traits, or structural characteristics, with the ‘vulnerable’ group. Small changes across climate, economic development, health, political, or societal risk indicators could push these nations into the ‘vulnerable’ cluster.
High levels of climate threats are apparent across the group, but high-risk health indicators across a host of countries, including Mexico, Peru, Ukraine and Vietnam, suggest susceptibility to rising heat stress and increased prevalence of diseases related to climate change. High-risk societal issues, such as urban population growth or violations to migrant workers’ rights, combine in countries like Brazil, Iran or Sri Lanka to raise the threat of political unrest, violence and even conflict, which further undermines a government’s ability to tackle climate risks.
Increasing social risk leaves Brazil on the brink
Dependency on agriculture is a key factor in a country’s susceptibility to cascading climate risks. Brazil’s coffee, sugar cane, beef and soy industries attract huge investment from overseas, making them critical to the economy, but they are also highly sensitive to climate shocks and longer term climate change. Our analysis shows the country is teetering on the edge of falling into the ‘vulnerable’ group, with which it shares 48% of traits – a change of just three percentage points would tip Brazil into that cluster.
Declining social scores in concert with increasing physical climate threats have the potential to trigger a chain reaction in the country. Secondary risks like rising migration would likely shrink the agricultural workforce, leading to reduced outputs, less revenue for the economy and greater food insecurity, which, in turn, could drive civil unrest and derail government stability.
Potential tipping points that would make cascading impacts more likely to emerge come in the shape of further negative changes in government effectiveness and stability, and the rule of law. All of these have declined in the past year under President Bolsonaro. A similar trajectory next year could well see the country join neighbours Bolivia, Colombia, and Venezuela in the most at risk bracket.
Mexico already in the midst of climate cascades
Mexico’s risk profile is a near match for Brazil. While Mexico is a ‘precarious’ country, climate risk here is significantly greater than the average across the ‘vulnerable’ cluster, driven by acute water stress. Pervasive corruption and an undercurrent of civil unrest keeps political risks close to that of the average ‘vulnerable’ country, while societal risks like violations of migrant workers’ rights and modern slavery also have a similar profile. And even though Mexico’s economic development is comparatively strong, the country’s postCovid recovery has stalled and inflation is higher than at any point over the past 20 years.
Mexico is already shouldering the load of central American migration and flows of people from across the region will only increase as climate change accelerates. Not only will this put pressure on the country’s creaking infrastructure, but it also exposes migrants to high levels of crime, rights abuses, and a political backlash. Further step changes in violence and instability could put Mexico’s integral role in US and Canadian supply chains at risk.
It is not difficult to see why countries burdened with poor governance risk factors might want to focus attention outside their borders if migration, civil unrest, and human rights abuses at home are exacerbated by climate change. Equally, it would be tempting to relieve domestic shortages of land, minerals, food, or water by seizing a better-placed neighbour’s resources, potentially sending them spiralling into a crisis.
War-ravaged Ukraine serves as an example of how conflict will exacerbate the susceptibility of a ‘precarious’ country to cascading risks. Currently, it shares 35% of traits with the ‘vulnerable’ group but it is difficult to see how the ongoing conflict with ‘precarious’ counterpart Russia will do anything but lower its resilience further. Scores for conflict intensity and government stability have plummeted since 2021-Q4, pushing an already ‘precarious’ country closer to the brink. The war will perpetuate migration flows by destroying infrastructure and housing, while undermining political stability. Loss of income from agricultural and materials exports will also weaken the country’s ability to manage climate shocks like floods or heatwaves.
Russia’s aggression might not stop at Ukraine though. Putin could again seek to distract from a steady erosion of economic power and geopolitical relevance through conflict. Against this backdrop, neighbouring countries will watch with caution at how Russia deals with rising temperatures melting the permafrost that supports its vast Arctic extractive infrastructure. If it is ill-prepared, the mining and oil and gas industries could be crippled, tanking the resource-dependent economy. Such conditions are ripe for unrest, violence, and populism that could again be channeled into regional posturing and war.
China provides another pertinent example of a ‘precarious’ country where the impacts of cascading climate risks could extend beyond its borders. The country is a long way from both the ‘vulnerable’ and ‘insulated’ nations – sitting squarely in the ‘precarious’ bucket. Yet its scores are riskier than the ‘vulnerable’ cluster average across several measures, including civil unrest, corruption, democratic governance, modern slavery, and rule of law.
China is the number one global destination for FDI, and the country’s relatively strong scores in economic and health factors are currently maintaining its safeguards. However, negative shifts in political or societal risk could see its susceptibility to cascading climate risks climb.
There are established links between warmer temperatures and increased levels of unrest; throw in urban population surges and then a recurrence of the type of protests seen in Hong Kong is a real possibility. Such large-scale events would have the potential to severely disrupt Western supply chains and stymie the country’s economic output. A heavy-handed response from authorities and security forces to large-scale civil unrest would also be all but inevitable. Rural-urban migration is already regulated but the Chinese Communist Party (CCP) could impose more draconian measures in the interests of social stability, effectively limiting the prospects of people outside the cities, ultimately paving the way for more widespread unrest, poverty, and food shortages in those parts of the country. Ultimately, the CCP could face a situation where foundational building blocks are removed for the country’s rural dwellers, creating a domestic division between its ‘insulated’ cities and ‘vulnerable’ hinterlands.
Today’s risk is tomorrow’s emergency
Cascading risks are already emerging and in some cases lie just over the horizon. The danger is that governments are simply not aware of the scale of the issue, or do not have the scope to prepare because they are already fighting multiple crises. Internal weaknesses and external threats will combine to drag down a nation’s overall resilience, and no one country will be fully immune. Addressing shortcomings at the societal, health, political, and economic levels will help create a stronger barrier against indirect climate threats cascading across societies and economies. As we said at the start, the dam is only as strong as its weakest block.
But it is not just governments that have a blind spot to these risks. The majority of businesses are not currently factoring them into scenario analysis and risk management approaches – and that needs to change.
Assessing the potential for cascading risks is the first step to closing this resilience gap. But it is difficult. By nature, these risks are unpredictable, diffuse, and hinge on a host of influencing factors. Stress testing business and investment strategies against high-impact scenarios will enable entities to identify, map out and prepare for cascading impacts. Getting ahead of the risks well before they snowball into direct ESG threats to operations, assets, and investments will be crucial as climate change becomes ever more apparent.