Jane: [00:00:00] Hello, and a very warm welcome to the LSEG Sustainable Growth podcast, where we talk to leading experts about a wide range of topics covering sustainability, business and finance. I'm your host, Jane Goodland, and this week I talk to Jaakko Kooroshy, who's the Global Head of Sustainable Investment Research here at LSEG. And today we're talking about new research on physical climate risks. In 2024, global average temperatures reached their highest level on record, driven by a combination of long-term warming trends and a powerful El Niño. And in the first half of 2025, extreme weather has driven insured losses above 80 billion USD this year nearly double the ten year average. So the new research is really important to help us develop a better understanding about these risks. So hold on tight. Let's hear more from Jaakko. Well, hello Jaakko, and very good to see you. It feels like you are a very familiar face on this show. I think this is number three that you are actually coming on the show. So welcome back and I'm delighted to see you today.
Jaakko: [00:01:06] It's great to be back.
Jane: [00:01:08] You are a regular now. So you're here today to talk about LSEG's most recent research around physical climate risk. And it's called the Net Zero Atlas. And of course, this is a report that we have been publishing for quite a few years now, haven't we? What year are we on now? I can't recall.
Jaakko: [00:01:23] This is the fifth edition now.
Jane: [00:01:24] Wow. Fifth edition. Okay, cool. So, I mean, this report is packed full of information and stats galore. So you are here to help us navigate through that and see what some of the key themes coming out. So last year's Net Zero Atlas focused on cities and in fact the G20 cities to be precise. But this year's report has gone a bit different. So we're focusing this year on countries and regions within those countries. Why is it important to kind of make that shift?
Jaakko: [00:01:52] So look, we actually focus on 4,416 different regions across eight G20 countries. So we're building out full physical risk maps for these eight G20 countries. Now, why these eight countries? It's where data is most easily available. But these are also big countries like China, the US. We're looking at Germany. We're looking at Japan. So we're talking about 2.2 billion people, 63 trillion in GDP. So about 60% of the global economy. So it gives you a good slice of the globe. Now, last year we did indeed look at cities. And that's a kind of a bit of a shortcut if you want, because we know that cities are one of those key vectors where climate risks are going to materialise. So we can kind of zoom in on these very specific locales. We wanted to this year to take a bit of a broader take and look across full country scale and understand how the geography of risk is changing. I think it's important to remember that physical climate risk is intensely local. So what do we mean by that? It matters where a river is, right? You might be a few kilometres away from the river, and suddenly you know that flooding risk looks very different. You might be in a forest a few kilometres away. Wildfire risk might look very different. Elevations matter. So you really have to kind of have that very granular understanding of where those hazards may materialise. But then you have to overlay that with very detailed GDP and population data. So to give you just one example, in Canada, in the wildfire season of 2023, an area half the size of Italy burned down, right? If you think about the wildfires in LA in January, those fires were a thousand times smaller, right, than what we saw in Canada. But they just hit those spots where it really hurts. So kind of understanding that interaction between those climate risk and GDP data is absolutely key for us to understand climate risk.
Jane: [00:04:04] That totally makes sense to me in terms of bringing those two factors together, which I think is why this report, I think is so fascinating for organisations around the world, including kind of corporates, but also governments and financial institutions. I just wanted to touch on this notion that oftentimes people will say, oh, climate change is something in the future. It's not something for us to be concerned about now. But some of the stats that are in this report, I think, really challenge that notion, right. So if people say to you, climate change is a future issue to be concerned about, what's your response? Is it do you think that's a fair assumption?
Jaakko: [00:04:39] Absolutely. I think you already mentioned in your intro that insured losses have been hitting records. Uninsured losses have gone a similar direction, even if you have much less good data on those. And last year we were writing about the risks for cities. We published our report back in November. One of the points that we made in that report is that a lot of these risks are probably going to start manifesting earlier and be larger than what people think. In January, LA was on fire. And it hit certainly earlier than what we thought. So it's this kind of dynamic there where things are starting to shift and we're starting to realise that a lot of this is going to materialise in a much more significant and much more near-term way than we think. And I think we also need to be mindful of the fact that financial markets are forward looking and markets are starting to price in these risks, whether it's insurance markets or in real estate, etc. and so that will bring a lot of these impacts forward for people when they're thinking about their mortgages or home insurance or things like this.
Jane: [00:05:42] Yeah, that's a really good point actually. I think let's just stay on this kind of time horizon thing for a moment, because if you haven't been paying attention, it's 2025 and that means it's 25 years until mid-century. It's kind of the magic 2050 number. I mean, it's quite incredible to think that it's only 25 years until the middle of this century. But anyway, in your report, you basically do some modelling around what kind of physical climate risk could look like mid-century. And you use the scenario which is, which is on a 2.4 degree scenario. So that's kind of looking at, well, what if the world warms by 2.4 degrees. What would be happening, right. So in that context like how credible is that 2.4 scenario? And in that scenario what are the most significant threats from your perspective?
Jaakko: [00:06:31] Look, of course nobody knows exactly how much emissions will go into the atmosphere by 2050 or by 2100. And so what warming scenario we will end up in is uncertain. And one of the things that's really important is that we obviously end up in one of those lower warming scenarios rather than those higher warming scenarios. What we model here is a high emission scenario, right, where emissions go up towards the middle of the century and keep increasing. You end up with 2.4 degrees around the middle of the century. And so that's where we're paying those stats. But even if you think about lower emissions scenarios, we would probably hit those 2.4 degrees a couple of decades later. And obviously the margins of uncertainty in these scenarios are significant. And they are significant in the projections as well. So what we're saying here is we're today at 1.3 degrees. This is a 2.4 degree world. It's certainly something that we're on a track for somewhere in the second half of the century, perhaps a bit earlier by 2050, if we're in high emission scenarios or a little bit later if we accelerate climate action. But we are currently globally in a well above two degree scenario. So that's that gives you kind of a realistic picture.
Jane: [00:07:52] So not only plausible it's quite possible which is which is quite sobering. So let's move on to what all this potentially means for economies. So the report looks at a number of hazards. And I'm keen just to understand those a little bit more. And then and then perhaps we can think about how those hazards manifest in terms of economic impacts.
Jaakko: [00:08:13] Yeah. So we look basically at five different hazards, cyclones. So those are hurricanes in the Atlantic or typhoons if you are in the Pacific. Heat waves, water stress, flooding and wildfires. And so in each case, we're looking at how that geography across these eight G20 countries is changing. And then thinking about how many more people and how much more GDP gets exposed to increased risks. And so we can think, for example, about cyclones which affect the eastern seaboard mainly of the US, Japan and a bit of China today. And then think about what happens as water warms and so there's more energy and in the ocean and more moisture in the air. And so you get these more extreme cyclones and you get them further up north, north. So what we see is that cyclone risk starts shifting northwards, in the US, in Japan, in China. And so that quite changes that risk exposure. So for example, if you think about the Japanese case, 80% of GDP and population will face a category one or higher typhoon on average at least once a decade. And so that 80% by 2050 is up from 5% today. Similarly, you will see, much greater exposure to extreme heat. So you know, if you think about exposure of more than 35 degrees for more than 30 days a year, that's like Phoenix, Arizona today, 327 million people, including cities like Los Angeles, Houston, Shanghai, Hong Kong will face those risks, up from just 10 million today. And so we see kind of how these different hazards are really you know, shifting on the map and starting to affect much larger parts of the population and much larger parts of the global economy.
Jane: [00:10:17] So how does that then manifest in terms of cost or economic impact?
Jaakko: [00:10:21] Well, days of course, the direct impacts. So the disaster recovery that you're facing, but it's also a lot of indirect knock on effects. It's things like supply chain disruptions. Right. But it's also time that Factories are not running right because they have been flooded and they need to need to be rebuilt. And then beyond that, there is also the impact from changing to insurance markets. What does it mean for real estate valuations etc., etc.. So much more second third order effects that are quite difficult to map, but very important if we're thinking about the aggregate macroeconomic impacts.
Jane: [00:11:05] And presumably thinking about those indirect costs, the effect on kind of raw material and inputs would also be problematic or increasingly problematic for kind of real economy companies, right. So that's another kind of supply chain impact, as you said, thinking about just not necessarily just moving things around the world, but actually the availability of kind of inputs and raw materials as well, which I think is an interesting area to explore, but probably very, very difficult to map. Okay, so we've explored some of these kind of economic impacts. I'm keen to understand, you know for a portfolio manager seeing this research, understanding that obviously there's going to be economic impacts associated with these scenarios, which are increasingly likely. What does that portfolio manager do when they kind of go back to their portfolio today to sort of say, okay, well, fine. Yeah, thanks for that information. But what do I actually start to do? What do I need to know? How do I start to reflect this type of research in my portfolio and my strategic asset allocation, for example?
Jaakko: [00:12:08] Well, I think we are on a journey here. We do not, in aggregate understand these risks very well, and we are still struggling to quantify them systematically across portfolios. Bring them into valuations, etc. I think there's parts of the financial industry that are a little bit further along the journey. Things like real estate where you have a very clear understanding of where the assets are. And they're not moving around. And so we can kind of model with some with some certainty, what kind of how those risks are changing. And we also see that in places like insurance or agriculture where, these hazards kind of manifest themselves very directly and impact valuations very directly. But I think by and large, our understanding of how physical risk changes, asset valuations, growth trajectories, etc. is still quite haphazard. And we're still in the phase where we are starting to develop these tools and starting to get really a feel for those geographies. Most portfolio managers know what companies they own, right? But they don't necessarily know what assets those companies own. And they probably don't know where exactly those assets are, right? Especially if you're running large diversified portfolios. So it's quite hard to actually systematically aggregate this up. And so what we're seeing at the moment is people developing a lot of tools trying to estimate what those impacts might be, how you start pricing that risk in and getting a feel for that shifting topography of climate risk. And that's really what we're kind of trying to do in this report. And there's many other similar research efforts out there to kind of start building that bottom up picture of where are hazards going to materialise, how are they interacting with assets around the world, and what's then the financial impacts from that?
Jane: [00:14:08] So I'm guessing the other thing that kind of fits into this picture is around information and data availability. And also an investor being keen to see what a company's climate transition plan might be, particularly in the context of what that company might do in terms of adaptation and or kind of mitigation around some of those physical climate risks. So all of these things start piecing together, which is why I think LSEG we speak a lot about climate transition plans, but it's for this very reason that actually it provides a more fulsome view about kind of an organisation's exposure to risk, such as what we're talking about today.
Jaakko: [00:14:48] That's a really interesting point, Jane. I think companies have been thinking a lot about the transition and how they're reducing their carbon footprint and how they're offering new kind of products and services for the low carbon economy. But increasingly, we see companies also starting to think about how they will adapt to these changing physical climate risks. As a matter of fact, we did a piece of research where we looked at corporate disclosures, and we found that across large and mid-sized companies globally, over a third now referenced some sort of adaptation measures. So that might be moving a data centre out of a flood zone. Or it might be making buildings more robust to extreme heat or flooding. So, so it really starts factoring in. And we see countries and companies drawing up these plans of how they become more resilient to these types of risks. And that's something that is very important also from an investor perspective. Because of course there is ways to live with these climate hazards. But you have to invest. You have to become more robust and resilient. And you have to plan ahead before disaster strikes.
Jane: [00:16:00] So transition finance, which we often talk about on the show, is not really only about kind of investing in, say, solutions or new technology. It should also be about kind of that adaptation transition to a more adaptive state which as you say, requires investment. So we're talking about fundamentally we're talking about risk here today, and we can't really have a conversation without about risk, without actually talking about the insurance market. Tell me about kind of the role of the insurance market, and also the likelihood of that market not being able to perform its function in a future state of where, you know, physical climate risk is perhaps exacerbated beyond what we see today.
Jaakko: [00:16:47] So let me give you just one stat, right. The county in the US with the lowest rates of home insurance is Miami-Dade County. And that's also the county with the highest degree of cyclone risk across the US. So we see in various markets where those risks are starting to materialise, that insurance is in some cases retreating or premiums are going up very quickly. And so there's a lot of pressure on the industry to start adapting. And actually, you know, I was a month ago at New York Climate Week, there were a lot of insurance companies out there and also local regulators of insurance companies that are thinking about, okay, how do we factor these risks in, you know, how do we innovate so that we can stay in those markets? Right. Because obviously, you know, that's business for insurance companies. They want to stay in those markets. But they need to be able to price those risks. And so, you know, kind of how do you encourage people to invest in resilience. Right. Because when you're investing in resilience, you're also increasing the insurability of the assets that you have. But these are very complex questions. And insurance industries are absolutely at the forefront of these developments, whether it's in the US, whether it's in Europe or in places like Australia.
Jane: [00:18:07] Fascinating stuff. So let's move on to, I guess, more of a kind of a global policy perspective, because really understanding climate risk and how it may kind of how all of this might turn out in the end is very much kind of predicated on the potential pathways forward that governments around the world take. So we are on the precipice of COP30, down in Brazil. And so let's kind of focus on what level of certainty we have around all of these stats and models that we've talked about and, and the and how that intersects with the global policy response.
Jaakko: [00:18:42] I think that's a really good question. I think there's certain things that we are very certain about. So starting off with, CO2 and greenhouse gases in the atmosphere, we know that more there is, the more warming we will get. That's something that is very well understood and scientifically documented. We also understand that a warmer climate, more energy in the system means greater weather extremes and heating it's things like, you know, warmer air can carry more moisture. So that means more rain, right? A warmer oceans. Have more energy. You get you get kind of bigger storms. These things are very well understood right now how exactly this will materialise in a very specific climate. Right? Ten, 20, 30, 40, 50 years into the future? Obviously, the uncertainty margins go up and in many ways, it's the question not only the uncertainty comes not only from, okay, how much emissions will we will we emit. But you know, once the climate starts warming, how does the whole system react? Right. And so climate scientists talk about these tipping points. That we might we might trip and suddenly you know, things can start behaving in very weird ways, and we can see suddenly significant shifts to the way the climate works if we get something like, corals dying off broadly or the Antarctic ice sheet starting to break apart, etc.. So there is a huge amount of uncertainty there, and that's why it's so important to advance with that precautionary principle. We know today what 1.3 degrees looks like. Do we really have the stomach to find out what 2.5 degrees looks like or not? Right? That is kind of the question that is in front of policymakers. And that's why it's so important to take that climate action to reduce those emissions and limit global warming to well below two degrees.
Jane: [00:20:49] I think that's a perfect place to stop, because let's just see what we can achieve collectively at Cop 30. And I think you've done an amazing job at connecting the very real physical climate risks, you know, in terms of sort of the weather events that we're seeing to how governments around the world work, to how investors should be thinking about it. That's a masterpiece. Jaco. And what I would say is I'd encourage people to look at the report because there's actually I think it's one of those reports that as you sort of open it up, you think, gosh, I don't know if I'm going to be able to get through this, but it's really, really easy to navigate. And it's got some brilliant kind of diagrams and schematics. So a very accessible. I definitely recommend people to log on to the lseg.com and check it out. So Jaakko, it's just left for me to say a very big thank you for coming on the show again. And you are very welcome back next year to tell us about next year's report, for sure. And have a great time down at COP30. And I believe you're off today, in fact. So enjoy.
Jaakko: [00:21:54] That is right, Jane. It's always great to be here, and very much. Look, forward to continuing the conversation.
Jane: [00:22:03] Great. Thanks so much. I hope you enjoyed that episode with Jaakko. And if you did, then please don't forget to follow us and rate us on Spotify, Apple Podcasts, or any other platform you use. If you've got questions, comments, or someone you'd like us to talk to, then do get in touch by email at fmt@lseg.com. That's all from me but watch out for the next episode very soon.
