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Hurricane Helene is a significant human tragedy with more than 200 deaths reported as of Oct. 4. Thousands more have been left homeless, with North Carolina hit particularly hard. And the property damage will be difficult for the thousands of homeowners to manage without adequate flood insurance.
[time-brightcove not-tgx=”true”]Estimates of the economic damage vary. Moody’s initially put the price tag as high as $34 billion. Others, which take into account lost economic output, say the toll could top $100 billion. Despite the magnitude of these numbers, it’s easy to let them go in one ear and out of the other. After all, historically a mix of government institutions and insurance companies have absorbed the cost of a few of these disasters every year, paying out to rebuild.
But past results are not necessarily indicative of future outcomes. As the number of billion-dollar disasters rises as a result of climate change, the economic toll of extreme weather will be increasingly difficult to absorb. Governments may hesitate to pay yet another disaster relief bill and insurers will likely continue to drop coverage in vulnerable areas.
The result is a grim reality: many communities, individuals, and companies are susceptible to climate-driven economic tumult. This is a “known unknown.” We know it’s going to happen; it’s just a matter of when, and, to some degree, where these challenges will hit. When they do hit, investors, businesses, and individuals will want to ensure that they’re not left holding the bag.
To understand the known unknowns of climate risk, it’s helpful to look at the numbers. In 2023, climate-related disasters cost the U.S. about 0.4% of GDP, according to a report from reinsurance giant Swiss RE. As the effects of climate change become more prevalent, those costs are only expected to grow.
This cost represents a drag on economic growth that affects every corner of the economy, but not every community, company, or firm will be equally hit. Repeated disasters in one area may result in a dramatic spike in insurance prices for the local community or for insurers to pull out altogether. In either case, residents may choose to leave an area, driving down asset prices and depressing the local economy. Local firms will be affected directly and indirectly.
A 2023 study published by the National Bureau of Economic Research looks at the effect of climate events on counties across the country. Severe storms, the study found, lead to a capital depreciation shock that drives down the value of local assets. Meanwhile, heat waves lead to a negative productivity shock that contributes to lower output. Both contribute to localized economic stagnation in the long-term.
Some of this may already be reflected in the price of assets, but much of it likely isn’t. After all, it’s hard to know when, where, and how extreme weather events will play out—even if we have a general understanding of the contours of a climate-driven downturn. This is a reality that insurance companies and asset managers have been grappling with for years now. “The degree of capital reallocation and the speed of that is going to be larger and happen more quickly than most market participants expect,” Brian Deese told me in 2020 when he was the head of sustainable investing at BlackRock.
At a national level, the most important solution to climate risk is to cut the emissions that are causing the problem. But with significant warming—and resulting climate disasters—already baked in, governments also need to double down on adaptation. Swiss RE says that one dollar invested in adaptation can save $11 in avoided climate disaster down the road.
With those figures in mind, it would be foolish to wait for the government to get to work on adaptation. Companies can look at ways to harden their physical infrastructure where it works—and, in some cases, to move to safer locations. Investors, too, can help nudge portfolio companies and assets to adapt. And anyone located in a risky area should have appropriate insurance—at least for as long as they can get it.
