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4.1.2 What are climate impacts and risks?

Climate change’s potential negative consequences and uncertainties are broadly called climate risks and are primarily influenced by societies’ and industries’ actions and levels of GHG emissions (climate impact). Climate risks can be differentiated into two types: physical risks and transition risks. While the first relates to changing climatic conditions or chronic risks, such as higher average temperatures, more frequent and extreme weather events, or acute and more intense rainfall and storms leading to floods and other disasters, the latter relates to the difficult transition to an economy that is required to emission significantly less GHG to the atmosphere. For infrastructure investments, both risk types lead to the loss of asset value: Physical risks, in the form of climate change and extreme weather events, lead to damages to the asset, increased costs (e.g., to protect, repair, and maintain existing assets), and disrupted operations (causing revenue losses). On the other hand, carbon taxes and bans on carbon-intense activities – introduced to slow down climate change and decarbonise the atmosphere – can result in price shocks, forcible closures, and expensive shifts in business activities. While not all costs and losses can be avoided, investors can manage the type and level of risk for their assets and portfolios.

The IPCC (2021) estimates that if emissions are reduced significantly and in a coordinated manner by 2050, some of the most severe consequences of climate change can be avoided. In the best scenario, keeping global temperature rise below 2 degrees Celsius would make climate change largely manageable for human activity. Conversely, constant or higher annual emissions will impact the climate, leading to a more significant temperature increase and an increasingly unlivable planet. Accordingly, climate impacts and risks are closely intertwined and must be addressed together.

IPCC (2021). Summary for policymakers [Masson-Delmotte, V., Zhai, P., Pirani, A., Connors, A.L., Péan, C., Berger, S.,… Zhou, B. (eds.)]. In: Climate Change 2021: The Physical Science Basis. Contribution of Working Group I to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change [3-32]. Cambridge, UK: Cambridge University Press.

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