CHAPTER 1
Introduction to Climate Risk

DIMENSIONS OF CLIMATE RISK

Climate change, environmental, social and governance (ESG) risks are no longer concepts limited to academic and scientific discussions. These terms have become common topics of conversation across the media, for politicians, policymakers, statesmen, corporations, governments, and regulatory agencies around the world. Currently, the international community is struggling to define appropriate approaches, policies, and treaties that can mitigate the challenges of climate change while keeping a level of healthy growth to support economic prosperity (NGFS, 2020; Smith, 2020; FSB, 2021; IEA, 2021; USDT, 2021).

There are four dimensions to understanding climate change (Table 1.1) and its impact:

1. the science of climate change
2. the politics of climate change
3. the economics of climate change
4. the social impact of climate change.

As a result of the increased social awareness on climate change issues and continuous media coverage, many people now believe that extreme weather events are occurring more frequently than in the past and that the pace of climate change is accelerating toward a catastrophic tipping point. This view also affects statesmen and policymakers, whose decisions can have significant social and economic consequences. The political, economic, and social consequences of perceived climate change are already tangible. Developed (wealthier) nations want less-developed (poorer) nations to delay or limit their path to industrialization by reducing their carbon footprint and greenhouse gas emissions. In turn, the less-developed nations want the developed nations to take the economic burden of fixing the problem they have created in the first place. Other nations want to take advantage of this situation by accelerating their development (resulting in increases in their levels of greenhouse gas emissions), while keeping their status of less-developed economies to avoid limiting their path to prosperity. These conflicting goals make it difficult for the international community to come to terms with climate change. The debate over these issues often breaks down into strongly polarized views: those who favor a man-made-only cause of the observed changes in climate in recent times, and those who favor natural causes due to solar activity, oceanic and atmospheric variability, tectonic and volcanic activity with an important but smaller human contribution.

TABLE 1.1 Dimensions of climate change

Dimension Description Chapters in this Book Science Scientific evidence of natural and man-made impact on the environment and climate change (physical risk) 1, 2 and 3 Politics Policies, regulations, and incentives for transitioning to a low-carbon economy, which can impact sectors, markets, and consumer behavior (transition risk) 4 Economics Risks and opportunities derived from corporate and investment strategies, practices, and actions to mitigate physical and transition risks 6-13 Social impact Social behavior, credibility, trust, social polarization, and their impact on the migration to a low-carbon economy 4, 5

Given the relevance of these issues, gaining a clear understanding of how and why climate changes, with or without human influence playing a role, is one of the most important issues for society today (Mayewski and White, 2002; Plimer, 2009).

The starting point for any meaningful discussion on the topic is to define the concepts clearly. For example, what is the difference between weather and climate? What does climate change really mean? Are the changes due to natural or man-made causes?

BASIC CONCEPTS OF CLIMATE

The primary distinctions between weather and climate are the period used to record observations and the geographic extent of these observations. Weather is the behavior of the atmospheric system in a specific region over a short period of time, ordinarily one week, a few days or even a few hours. In contrast, climate is the behavior of the weather over extended periods of time, ranging from seasons to years, decades, centuries, or even millennia, and across extended geographic regions such as continents, subcontinents, or other large regions (NOAA, 2024).

The sciences of meteorology, oceanography, geology, and physical geography have advanced dramatically in the past century, assisted by advances in the systematic collection of local measurements across multiple regions of the globe, satellite imaging, the digitalization of information, and increased computational power. Furthermore, the scientific community has learned a great deal in recent decades about the dynamics of atmospheric and oceanographic phenomena and has constructed (and continues to refine) numerous complex models to simulate the global effects of climate change and the consequences of extreme climate patterns.

These models provide valuable insights into possible climate scenarios, their drivers, and the speed of change. But they also require objective scientific validation through strong evidence that demonstrates that these predictions are reasonably accurate and that the physical models driving these predictions and the data used to calibrate these models are comprehensive and complete. This limitation is a significant challenge for the scientific community, given the synergies and non-linearities observed in atmospheric and oceanographic phenomena, including complex energy and mass flows, which are exacerbated for long-term forecasts. Also, many physical and chemical phenomena occurring in the atmosphere, oceans, and continents are poorly represented, and even ignored, in these models, due to their complexity or lack of detailed knowledge.

Furthermore, actual records of weather patterns and climate change recovered from instruments that measure temperature, wind speed, precipitation, atmospheric pressure, and sea levels only extend back into the nineteenth century for the northern hemisphere and cover even shorter periods for the rest of the world. Constructing historical records on climate change requires extensive detective work to stitch different pieces of information into a coherent picture of past events. For example, changes in temperature or the level of CO2 and other gases in the atmosphere over thousands of years can be inferred from the analysis of ice cores drilled around the globe.

When snow falls through the atmosphere and is deposited and compacted into ice in extremely cold regions of the planet (such as Greenland or Antarctica), it traps gases, dissolved minerals and chemicals, dust particles and sediments that can reveal the composition of the atmosphere at that moment in time. If the snow that falls does not melt or evaporate during the year, next year's snow will fall and accumulate on top of the previous year's snow. Over time, the snow layers compress and recrystallize under their own weight, creating ice and trapping small pockets of air, dust, and sediments. Ice cores capture changes in the physical and chemical composition of ice, trapped air bubbles, dust, pollen, and sediments that provide a vivid view of past environments and events, even recording climate changes over relatively short periods of time in great detail. The analysis of ice cores also reveals evidence of past volcanic eruptions, forest wildfires, changes in air humidity and dryness reflected in the composition of the trapped dust particles.

With long climate change records of 800,000 years, 2.7 million years or more available from ice cores and other paleoclimate sources, scientists are beginning to describe the natural processes of climate change, which can provide the theoretical foundations for assessing the extent of human influence on the climate (EPICA, 2004; Plimer, 2009; Voosen, 2017).

The term "climate change" is often misused as a substitute for any global shift in climate patterns that could result in a catastrophic anomaly leading to extreme weather events, such as severe hurricanes, floods, and droughts, or sea levels rising at abnormal rates. However, the climate has changed in the past in response to natural phenomena, including dramatic and sudden shifts. Ice core records confirm that the climate has changed significantly in the past and will likely change in the future. The Earth is a highly complex dynamical system, driven by internal factors (such as ocean-atmosphere interactions, heat redistribution between the Earth's core and mantle, and tectonic and volcanic activity) and external factors (such as the Sun's electromagnetic radiation, or the gravitational pull from the Sun, the Moon, and other celestial bodies). Furthermore, while natural climate changes were once viewed as moderate shifts against a backdrop of ever-changing short-term weather patterns, we now know that there have been several rapid climate change events (RCCE) in the past. These rapid changes shifted the regional and global climate very quickly. The ice core records have demonstrated that RCCEs occurred far more frequently than previously thought. RCCEs are massive reorganizations of the Earth's climate system and were more...