Known unknowns: The hidden threats that climate risks pose to British prosperity (2nd ed)

The second edition of this report is updated in light of the Paris Agreement, and includes a new foreword from Michael Jacobs, visiting fellow and associate director for energy, transport and climate at IPPR.

There is a growing body of evidence that the UK faces significant risks to its security from climate change. This is true whether or not the world achieves the goal it established at the Copenhagen summit in 2009 of limiting global temperature increases to no more than 2ºC. Yet markets and financial decision-makers continue to pursue business as usual. We learned from the financial crisis the importance of seeking out and exposing hidden economic risks to enable them to be better managed to protect individual and collective capital. It is time for us to follow this lesson again.

It appears likely that we face a future of dangerous global temperature increases, of more than 2ºC, and therefore of increased climate-related risks. Evidence suggests that the levels of warming we could see in these scenarios would pose a dangerous threat to human health, our food and water security, and even to our national security.

This report focusses specifically on the future threat posed to British prosperity from climate risks, as well as the significant economic impacts that have already been felt.

Our research identifies three broad reasons why markets are currently failing to account for climate risks.

1. Climate risks are seen as too distant to be relevant to financial decisionmakers, who tend to focus on a short-term timeframe in which climate shocks are seen as unlikely to have a significant, financially material impact.
2. Climate risks are very uncertain – they are ‘known unknowns’. We may know some of the risks associated with different levels of increased temperatures, but it is still unclear what the actual temperature trajectory will be, and how its effects will be distributed across sectors and geographies
3. Climate change is widely acknowledged to be an ‘ethical’ concern and a matter for public policymakers, but climate policies are not taken seriously by many businesses and investment managers.

Responding to each of these issues in turn, we present policy recommendations that can deliver on the following objectives.

• Build understanding of where the UK economy is vulnerable to climate risks.
• Ensure financial decision-makers have the information they need in order to account for climate risks.
• Ensure asset managers do not ignore these risks in their decision-making.
• To reduce the overall level of the risk that most businesses face as a consequence of climate change