McKinsey on Climate Adaptation: The Global Resilience Gap

You're listening to Climate Rising, an official podcast of Harvard Business Schools, Business and Environment Initiative. The world has many proven cost-effective adaptation measures, but that's not a guarantee that adaptation will happen. We're already seeing the resiliency gap today of the four billion people exposed around the world to hazards today, only one billion are well protected, and the need for adaptation will only rise with a changing climate. Our estimates would suggest at 2C the world would need to spend 1.2 trillion dollars a year with the vast majority of that going to heat and drought. This is Climate Rising, a podcast from Harvard Business School. I'm your host, Mike Toffel, and this episode we turn to climate adaptation. Our companies respond to the risks already unfolding as the climate changes. My guest is Makila Krishnan from McKinsey Company, whose work spans the McKinsey Global Institute, McKinsey Sustainability, and McKinsey's Risk and Resilience Practice. She leads McKinsey's research on climate risk and sustainable growth, and her team recently published a global analysis of climate adaptation needs. The report concludes that while billions of people are already exposed to climate hazards, current levels of investment fall far short of what's needed to protect them. We'll explore what's driving this gap. We'll also look at how businesses are beginning to respond and where the biggest opportunities in blind spots remain. Here's my conversation with Makila Krishnan, partner at the McKinsey Company. Makila, thank you so much for joining us here on Climate Rising. It's great to be here with you, Mike. So, we met at New York Climate Week a year ago over dinner, which was super fun. That was really fun. And at the time, you were talking about this report that was coming out on adaptation. And here we are talking about that report that's now come out. So, I'm really excited to have that conversation. But maybe before we get started, if we could just give us a sense of what your job is at McKinsey and a little bit about how you got there. It's great to be here and great to be having this conversation, Mike. A little bit about myself, I'm a partner at the McKinsey Global Institute, what I mean, this conversation referred to as MGI, which is a think tank that sits inside of McKinsey. I got here by way of quite a detour. So, after I graduated, I graduated from undergrad, I had an offer to join McKinsey, turned it down, went and did a PhD in mechanical engineering. But at the end of that, decided to come back to McKinsey and found my way. I was doing generalist consulting work, found my way to the McKinsey Global Institute, where a lot of my work focuses on issues that I would say are at the intersection of the physical world and how we've built our economies and societies. And that's maybe where my engineering background comes into play. I'm really fascinated by questions that have to do with limits, opportunities, and how we use effectively the physical resources that exist around us, and then how we use that to support economies and societies around the world. Great. So, let's dig into this adaptation work. So, first, maybe who's the target audience for the work that you set out to do? So, I think as with all MGI research, it's really geared towards policy makers and decision makers at companies. That's really the primary audience. But I would say in this space on adaptation, the world's understanding on this topic is so much more nascent than the world's understanding of anything to do with decarbonization. As you mentioned, the marginal abatement cost curves are 20, something here years old now or 20 years old now. And so, part of it for me was also how do we actually, as a world, start to understand this topic, whether that's academics and researchers, whether that's nonprofit organizations, whether that's other think tanks, whether that's others' individuals, really try and understand and unpack what that term of adaptation means, not just today, but also going forward in time. I joke that what we've put together, I think, with this research, I think about a little bit as a 16th century map of the world. But, you know, those maps that people would have back in the day, which were maybe so quite 16th century, maybe 17th century, it's probably like, largely correct, but there are still gaps. There are still things we need to do to enhance our understanding. But a lot of it for us, beyond reaching our core audiences, was really improving how the world approaches decision-making around adaptation and understanding of adaptation. And with adaptation, there's such a wide array of topics to think about. Various stressors, what I call stressors, or perils, which I'll start with heat and moisture and go from there to hurricane risk, droughts, flooding, sea level rise. There's different sectors and how they're going to be impacted. This is geographically diverse, very in some ways, quite different from the carbon issue of sort of atmospheric carbon, which mixes pretty well. So how did you get your hands around scoping this effort? Because I imagine it could be 1000 pages or it could be 100 pages and part of that's going to have to do with scope. Yeah, we were very ambitiously when we started the work. We had this insane scope, which I'll talk about in a moment, but we were like, we'll just be done with it in a year and then here I am two and a half years later, I think talking about the work. So it was quite the undertaking. So we knew we wanted to do something on adaptation. For a few reasons, one is that we're certainly starting to see more companies interested in this question. Companies can of course decarbonize to reduce their own emissions, but they also live in a world where they're experiencing risks today and the expectation is those risks will rise. So they've understood more that this is not an either or this is an end conversation between decarbonization and adaptation. We're seeing more and more countries start to ask questions around adaptation. I think we assessed how many countries have submitted national adaptation plans, which are their charter as a boron adaptation, and the number has gone up from about somewhere in the 80s, about five years ago to 141 countries today that have national adaptation plans. When we look at the academic literature on this, it tends to be very barbell-like. So you either have very micro-based work. So it's Mangrove project in Bangladesh, or there are some very quote unquote macro-based work that is trying to build a view of how do you develop good adaptation strategy? In some cases, trying to also cost adaptation, but done in quite a piecemeal way, meaning not a holistic view of hazards, not a holistic view of measures, not even oftentimes a consistent view of time horizons, meaning you're mixing and matching a 2030 cost for something and a 2050 cost for something else. So our scope was geospatial and global today and going forward. We ended up narrowing the number of hazards we looked at to eight. So we looked at three different kinds of heat, three different kinds of flooding, wildfire and drought, and then really taking this economy's lens, so really understanding each place and what each place experiences in terms of hazard and then thinking about adaptation responses. Wow, that sounds like an ambitious scope. Yes, my grey hairs have increased as a result of that. And how big of a team was assembled to work on this? So it varied over time. We had almost two phases of work that we did. So the first phase was really the climate and almost exposure modeling. By that, I mean, once we defined these sets of hazards, really understanding what the climate, the unensemble of climate models, a set of climate models, tells us, for example, with heat, how many days are you going to experience in different parts of the world of heat above a certain temperature level or a certain threshold? And then overlaying that with where people and economic activity is. So that was one phase of work where we worked with climate scientists. We then asked questions around adaptation, right? So if we know how many people around the world are experiencing events of different kinds, how do you think about a suite of adaptation responses? How do you understand penetration of those adaptation responses today? And then how do you cost those responses? So that was phase two. And so we combined the two, the two and a half years or so of work. And that was somewhere between a three to five person team. Okay, got it. Wow. So that's a substantial investment in this report. Multiple years, 10 people, maybe more. Yeah. And drawing on just amazing resources that exist out there, right? So we are not climate scientists. So we drew on models that are cited in the IPCC. We just a lot of climate data and just great thinking that exists in the world. And then really a lot of it was how do we structure these models, these analyses to give us tractable answers. So let's turn to the findings. So at a high level and then we can dive in, how do you describe the findings of this report? I think the thing that really at its core stands out as the heart of this for me. So you start with a view that in many ways human beings have been adapting to their environment for centuries, if not millennia, right? Just as for fun, we went back and we looked at Mesopotamians dealing with drought risk or Netherlands, which used to be called the low countries dealing with flood risk. So in many ways, cost effective proven measures for adaptation already exist and human beings have been deploying them for centuries and millennia. But if you then really start to look at the problem, there's two challenges that exist. The first is that despite the existence of these proven cost effective adaptation measures, already today the world experiences a resiliency gap, meaning not every part of the world spends on these measures. And in fact, we can get into this in a little while, but in fact, large swatso the world are substantially underprotected. So despite the fact that these proven measures exist large resiliency gaps already exist. around the world today. So that's one problem. The second problem is that the climate is not static. And under the current trajectory of emissions, the world is expected to warm by 1.5 C relative to pre-industrial levels by about 2030. This is not just one year of 1.5 C, but multi-decadal periods that exceed 1.5 C by 2030, warm by 2 C by 2050. What that means is that not only are we understanding today, but spending needs are expected to rise going forward as you look ahead. And so really what the work then does is be able to say where is the world understanding today, which places, which types of hazards, where our needs likely to rise going forward. And then really try and understand why is spending not taking place. And then what do people need to do to unlock that spending, which spoiler alert is not just about finance. It's also about a whole lot of other things. You mentioned the phrase resiliency gap. So can you unpack that for us a bit? There's many different ways one could think about managing physical climate risks. So physical climate risks is things like heat. As I said, we looked at three different types of heat, flooding, a wildfire drought. You can actually manage that with three different types of tools. The first is what I call adaptation and what we refer to as adaptation in this research, which is essentially measures that you put in place to either reduce your vulnerability to the hazard. So think about this like you're elevating your home to eliminate flood damage or minimize flood damage or reduce your exposure to the hazard, meaning you're not building the home in a flood zone in the first place. That's adaptation. That's what we call adaptation. You could also do things like insurance. So that's transferring the financial burden of the damage should it occur. Or you could do things like disaster recovery. So you let the damage hit and then you rebuild post the event. And so for our purposes, we focused on the first, which is adaptation. So sets of measures that you can put in place to reduce your vulnerability or reduce your exposure to the hazard. As you think about even that question, then there's so many things that sit under the toolkit of adaptation. As I said, we've been doing this in many ways for centuries millennia. We ended up narrowing our list down to what we refer to in the research as 20 commonly used adaptation measures. These are things that could span, for example, irrigation to manage drought. We looked at air conditioning as one example of a measure to manage heat. Also things like passive building cooling, things like open trees, then measures like undergrounding of power lines to manage wildfire risk, things like sea dikes or levees to manage flood risk. We identified 20 measures. The lens for these 20 was really to say, let's look at measures that are not sector-specific. Oh, I walk in mining and in mining, we do sediment control. We didn't want to go that narrow. So we look at measures that were widely applicable across sectors and fairly commonly used and also provide a high degree of protection. Okay, so with that definition of adaptation. What do I mean by the term resiliency gap? As I mentioned, the world already experiences climate hazards today. Any guesses on if you think about the landmass of the earth, what percent of the land mass of the earth do you think experiences relatively high degrees of heat while fire flooding or drought? That's an interesting question. What percent of the land mass? I would think it would be relatively small like 20%. Okay, so our number was actually 40% double what you just said. And of course, this is a bit of a trick question because it depends on how you define the different events. So that was another, by the way, the phase one exercise that I described, a big question mark that we grappled with of how do you actually define an event? There is no standard set of definitions in the community on how you define different forms of hazards. And eventually what we settled on was let's define hazards based on what has been typically known to trigger some kind of adaptation response. So if you talk to flood engineers, they might use the term one in 100 year flood, which is essentially a flood with a 1% likelihood of occurring. And that's usually a design standard. Some places use more stringent ones. Some places use less stringent one. But that's a design parameter that exists for flooding. So we tried as best as possible to identify common design parameters for these different hazards and these different measures. But based on those common design parameters, we find 40% of the earth is exposed to climate hazards today. We then said, okay, if we take these 20 adaptation measures that I refer to, when we look at 40% of the land mass that's exposed, by the way, that translates to about 4 billion people around the world that live in these places. What we found was that only about a billion of those people had substantial protection with those 20 measures. And about 3 billion people had very limited protection. And so that is essentially what constitutes a resiliency gap. It's the fact that there are places in the world that are exposed to these hazards, but have either no or very limited protection against these. We also translated that to dollars. Essentially, what we found is that to protect those 1 billion people, the world on average is spending about 190 billion dollars a year. That includes both operating expenditures and amortized capital expenditures. So a simple example of that is a seed-like built in the Netherlands to protect all 4 billion people with those 20 measures would cost 540 billion dollars. So there's a resiliency gap even in dollar terms of about 350 billion. So this is what I meant when I said, even though we have these cost effective proven measures, we're not spending today. And that must embed a whole host of assumptions about how much of that additional spend should be dedicated to reducing vulnerability versus reducing exposure. Like how many people would have to move versus protecting them in place just as a simple example? Yes, indeed. And this is why I described this a bit as a 17th century map, where the kind of simplifying assumption we made was these 20 measures. We looked at the prevalence of those 20 measures. So in our list of 20, the act of moving is not included just because data on that is really poor for this kind of first pass. But we would include things like are your buildings, flood proofs, do you have coastal protection of some kind, do you have a levee system, if you are in an area that weather river runs through, etc. So these are big numbers hundreds of billions, but not trillions. How do you think about putting those numbers into perspective? That's a great question. And we should talk more about this in the go forward sense as well. One way to think about it as as a share of GDP, right? And so what we tend to find in general is that as a share of GDP, the resiliency gap as a word today tends to be much smaller in cities compared to rural areas. Some of that is because you can think about measures like CDIX protect many people, you get bigger bang for the buck as it were in a city because you're protecting more people for the same cost than you would in a road, more sparsely populated rural area. Some of it is because it's just this GDP of cities is larger than it is in rural areas. So one way to think about dimensionalize these numbers is as a percent of GDP. And in general, we find that as a percent of GDP, both the need as well as the gap tends to be lower in cities than it does in rural areas. That matches an intuitive sense of the cost of just maintaining existing infrastructure like roads. On a per mile basis, it's just more expensive on a per capita basis for which is a proxy for some of these expenses in a rural area than it is in a much much harder to maintain roads in a rural area than the urban area. Exactly. Yeah. Exactly. And I think the corollary, where we also applies to by income. So part of how we did the work was we divided the world into income groups and up density groups. So we said every pixel on the planet, we tag it as a high middle or low income pixel and we tag it as a rural area, a peri-urban area and an urban area. And in general, what we find is not just as cities better protected compared to rural areas, not surprisingly high income places are more protected, meaning at even at a pixel level, high income places tend to be better protected than low income places. Got it. So this is the current events piece of the report, bit of a census and a gap analysis is how I would think about it. That's exactly right. It's like a stoptake of where we are today. I will say that some things that were somewhat counter-intuitive maybe about even today is that if I talk about the one billion and the three billion gap. So it's true that most of the three billion gap people that are not protected or have limited protection are in low income places. But about 700 million people off that three billion is in high income places. So even in high income places, we don't have full degrees of protection. We tend to find that in high income places, the largest gaps, this is going to surprise no one that has read any news in the United States. But the largest gaps in high income places tends to be to wildfire. And to some extent, this was a little bit surprising, also rain excessive rainfall related flooding, maybe one surprise people living in New York. When it comes to low income and middle income areas, it's many different hazards. Low income areas, a large portion of their exposure. So low income areas often tend to be in South Asia, for example, or South Africa. A lot of their exposure is to heat, and that's where a lot of the gaps, both in terms of people protected as well as the spending needs are to protect against heat. Okay, so then in the looking ahead portion, let's dive into that. So what was the goal of that? You mentioned modeling before and the difference between today and the future is going to depend to some extent on the decarbonization efforts that actually occur, but it's widely assumed now that we are going to have lots of changes physical climate changes regardless of how much decarbonization we engage. And even if you turn the spik it off tomorrow of greenhouse gas emissions because of the slowness of the system, today's emissions or yesterday's emissions will still be impacting the environment for decades to come. And in some cases, longer than that. So different scenarios, you mentioned IPCC, the UN Sorsium of scientists who are looking into this, they have different model projections. That's the baseline. What it makes you add on to that baseline. Different people actually have different views of what a baseline is. And so first and foremost, what we did was to try and say was we thought a lot about how does one even conceive of a baseline in a world where the Paris Agreement, at least for most countries in the world is still enforced. How do we think about what we're planning for? And what we converged upon was to say, let's actually look at what scenarios are telling us about expectations on the current trajectory of emissions. Because just from a prudent risk management standpoint, a prudency of adaptation standpoint, that's the kind of quote unquote base case scenario that it's important to plan around at least. We identified about 25 different scenarios, some by the IPCC, some by the organization called the network for greening the financial system. It's a consortium of central banks that have built scenarios for financial institutions stress testing. Some of our own McKinsey scenarios around the current trajectory of emissions and where that gets us. And we put all of that together and we found that across the 25, there's actually a lot of consensus that the world will get to about 1.5 C by 2030 to C by 2050. And so that was our starting point. So we are on baselines. We're talking going from there. This baseline of misleading, what I meant to say was baseline trajectory because I wanted to convey the idea that things are moving. We know things are moving. You would concluded that the 2030 and the 2050 are sort of consensus targets. Like we understand roughly where we are. So we can take out you can just keep going from there if you like. Okay, so then if we think about 1.5 C by 2030 and 2 C by 2050, what does that matter for adaptation decisions being made today? The first is that a lot of things we're putting in place today for adaptation have long lifetimes. So if you're thinking about putting in place a C-dike for example, that's something that could last 30, 40, 50 years or longer. And so it's important to understand the future climate as you're designing adaptation decisions even today. The second is that adaptation also can come with long lead times. So putting in place implementing any of these projects, even in the Netherlands, which you would argue is a country that is used to implementing flood protection measures, it took about 10 years to build the project from start to finish. And so both because of the lead time and the lifetime associate with adaptation, understanding the future, even for decisions today is important. So what happens basically as the world warms to 1.5 C and 2 C? If you recall the 40% number that I mentioned on landmass, you start to firstly see more and more places around the world exposed. So that 40% that exists today becomes about 75% of landmass that's exposed by 2 C. So more places around the world start to experience climate hazards. So that's the first thing that happens. It starts to spread and more places start to experience more hazards as a result. The second thing that happens is that places that experience hazards today also start to in some cases experience them more severely. So an example of that is heat stress, which is one of the three heat hazards we looked at, which we define as long periods, weeks or longer, of very high heat and/or humidity conditions such that human productivity is affected, workers get tired more easily, need to take more breaks, etc. Human health can also be affected in some cases. And so today the places that experience heat stress around the world on average experience about 12 weeks of heat stress, at 2 C the places that experience heat stress around the world experience about 16 weeks of heat stress. And so you have this phenomenon where more places start to become exposed and places that are exposed today start to experience events with greater frequency or greater intensity. Got it. And so what all of that means is that costs for adaptation rise. And so that's really the analysis that we did looking forward out to to see. And you do this, you said around the world. We did this around the world. And so far we're talking sort of infrastructure projects, but that's just one of the resilience or adaptation measures that of your 20 I imagine like seawalls for example. There's more operational approaches like having scheduling differences. Have people work not in the dead of the day because it's just too hot and so are have people work at night or other approaches like that won't show up in these enormous infrastructure projects. So is that part of your analysis as well? These more shorter term measures as well? Some of them we as I mentioned we picked 20 different types of measures. A lot of them are infrastructure especially when it comes to things like flooding. So they would be things like building a cdike or building a levy. Some of them are more what I would call projects, but not infrastructure. So things like building an irrigation system is an example of that. Some of them are more individual consumer type measures. So we looked at personal cooling equipment, which is something that you can provide to people to protect against heat waves. We also looked at things like only warning systems, which are alerts that you can provide to people to warn them of everything from heat to flood events taking place. Other kinds of cooling measures like air conditioning. So it's by no means a comprehensive list, but it's a wide list that actually spans quite a lot of different types of things. It's also got a good and interesting spectrum of the benefit of the measures. So for example, something like a cdike, once you build the cdike up to a certain height, it will protect you to every flood up to that height provided of course it's well built. Something like undergrounding a power line and managing forest foliage and cover to protect against wildfires doesn't fully eliminate the risk it just reduces the likelihood of the risk. So the nature of these adaptational measures also vary. Some come with high op-ex, some come with high cap-ex. So a huge spectrum of things in there. Things I would like to add on over time is things like the the re-refer to the reducing exposure idea before that wasn't someone of the 20 that we looked at. So there's a few that I would like to treat. This is a living thing that we continue to expand on over time and those are examples of things I'd like to add. One of the findings in the report talked about there's opportunities that actually have high benefit to cost ratio. That's surprised me and there's always some low-hanging fruit and anything one looks at. But it seems to me in this area the reluctance to invest in these areas is often because it's just so expensive and if you invest a lot of money on a low probability event and it doesn't occur then people look at you like you just spend gazillions of dollars on a device and it's never been tested and you could say like might have happened and it's a bit like buying insurance where every year that you don't use your insurance someone might say I was always too money but others just say no we felt well protected in case the hazard arose. Tell us a little bit about the high benefits cost ratio what are the types of investment opportunities or expenditures that you saw that had that characteristic and why do you think they exist out there. Anchoring on the disorienting on some of the numbers of spend that increase going forward first and then I'll get to your question. So remember I said today there's already a resiliency gap the world is spending 190 billion dollars today to protect everybody with these 20 measures at a high standard of protection would cost 540 billion dollars today at 2 c that number would go up to 1.2 trillion dollars a year. So by spending 190 billion today if we are to protect everybody to high standards that would cost 540 billion dollars by the way those standards that we measured that goes back to the one in 100 year flood that I alluded to these are standards that are adaptation standards largely in developed economies also to some extent in developing economies in the research we keep using this phrase developed economy standards that's what we mean by that. So 190 billion 540 billion rising to 1.2 trillion a year at 2 c and that's because of what I mentioned about more places becoming exposed and places becoming exposed more intensely more frequently more severely. So the good news though is the measures that we're talking about as you said have high benefit to cost ratios and interestingly today the average benefit to cost ratio of implementing adaptation is 3 to 1 where for every dollar you invest in adaptation you get $3 of benefit on average in terms of your avoided damage going forward at a 2 c world partly because we have more a bigger economy in the world partly because we experience these events more frequently more severely more places experience them that number becomes 7 to 8. one. But if anything, the benefit to cost ratio actually goes up over time, not down over time. Yeah, that's interesting. And this is over what time period? If you say that three to one, is that a dollar expended sometime in the next 20 years compared to the three dollars cumulative benefit or present value of that benefit over the next 20 years? Yeah, so this is assuming over the lifetime of the asset, the spending and the lifetime of the asset, the potential benefit in terms of avoided damages, accounting for the frequency and probability of different events, some of our events are acute events. So we looked at a probability distribution curve associated with them, some of them are more chronic events that happen every year, things like a heat stress event that occurs every year. So we accounted for that in a little bit across both different both types of events. But as you said, despite that positive benefit to cost ratio, we're not spending already today. And there's no guarantee that we would spend going forward. And so part of why we asked ourselves, part of what we asked ourselves and this to me was really the aha moment for me on the research was, why is this spending not happening? And there's actually a few different types of reasons for why it's not happening. As you look at the data and if we aren't able to fully attribute every reason to every place or location or decision, but if you look at the data a few things stand out. The first is that, as I mentioned previously, low income places are clearly less protected than high income places. It's widely apparent in the data. About 85% of people living in low income places have limited protection compared to only 25% in high income places. And so clearly there is a capacity to pay competing, spending priorities question that is happening in the here and now. And that's abundant in every measure we look at in across every geography, low income places tend to spend less than high income places. So clearly a capacity to spend issue. The second is you and you mentioned this, it's the nature of the benefits, right? So the nature of the benefits is that you avoid the damage and you avoid a damage, especially for acute events, only in the instance where the event actually occurs, which is not by any means guaranteed. And so there is a cognitive bias almost a reluctance spend that can happen as a result of that. And there's a very interesting academic work that is found, for example, when a wildfire event occurs, you start to see spending increase post the event. And that's because it's created this recency of the event. And then over time again, spending starts to fall. So this idea that the nature of the benefits are not just intangible in the form of an avoided damages, but they only occur. They're only manifested if and when the event occurs is a very real thing. And this to me is one of the main reasons why one of the largest gaps we see in high income places is to wildfire risk. The third, I think, is a risk awareness gap. And this, I think, is likely to be an increasing challenge going forward as the earth warms because people's understanding of the risks that they're already exposed to and how those risks could increase going forward. I think the more work needs to be done to create that awareness. And then finally, there are real implementation challenges. Remember I talked about the Netherlands project that took eight to 10 years to execute these things, especially their large infrastructure things, projects, if they're things that involve coordination across communities, they can be really hard to implement. And so you see that, especially with some of the more infrastructure oriented measures. And then finally, there is actual financing, which I'm distinguishing from the capacity to pay a question of how do you actually get capital to flow, especially in places where the person that is incurring the expense like a taxpayer is not the person that sees the benefit. So questions around misaligned incentives that can create financing challenges as well. Yeah, it's interesting. You call it a financing challenge. I think it's, I think of it as a political challenge because both politicians and the voters who elect or unelect them want benefits now. And of course, you can try and match the benefits with the cost by using debt as we do with schools and bridges and so on. Say if it's bridges or the schools going to last for 50 years, we shouldn't all pay for all of it today. We should spread that cost across the 50 years so that the beneficiaries become taxpayers at that time and share in that burden. But you still need to pull the trigger and people have to agree to incur stream of debt payments. And for something that in a world of competing priorities, it seems to me, this is going to be hard to get people to really celebrate these types of investments, especially one of the things that I face when teaching or grappling with that optician is when you're talking about physical risks, it's not really good news, right? The avoidance of problems is a little harder to get people rallied around versus other types of opportunities. There's no like a school you have bigger and better acoustics and a new shop and all sorts of benefits that you can then see when it's built or solar power. You can get a sense of you could see the solar array or when you get a sense of when we're trying to solve the problem and there's a physical manifestation every day it's solving the problem because it's substituting for fossil fuel combustion. But this adaptation measures that I'm familiar with seem like they don't have that same cache, that same excitement. And are you seeing any examples where people can actually get excited about these types of things? I would like to think that over time, even the sorts of things we've been talking about, people would get excited about. Part of partly because it allows you to continue to drive economic growth, continue to live resilient lives, right? And so I think part of what has started to change in this debate a bit is use of the word resilience. I think for maybe that reason, I think there is a class of measures that do come with what people in the community refer to as co-benefits. So irrigation is a great example of that, right? So it not only if you put an irrigation system in it not only protects you from drought, but oftentimes can enhance yields for farmers. And so there are measures that come with these co-benefits that I think are being talked about now a lot for that reason. And there is now increasingly maybe a third category of measures that people are paying attention to, which is areas that are maybe frontiers of technological innovation. So partly again, can you get venture capitalists or private equity excited about new opportunities? So this isn't things like, can you get better climate data and better climate analytics to be more decision-ready as you're making these kinds of investments? Or can we think about a new class of say drought resistant seeds? Or can you think about new materials to help with wildfire protection? So there's also that kind of more frontier innovation starting to happen in the space. But I think there's also just how do we talk about adaptation today? So it doesn't feel like this ugly gray seawall boring project. And then also how do we talk more about co-benefits related measures? Yeah, no, the co-benefits is a really important one. As is the product or service economy that will arise out of the growing need for these products. It is very different. I often stress this in our classrooms here. Thinking about physical climate risks and alternatively transition risks, which have more to do with if we price carbon or if norms change so that people actually exert preferences for decarbonized products, those are very different worlds. And the one thing we know about the physical risk is that they are coming. We don't quite know how big they will be and we know the very over space. But that will for sure create demand for new products and services to help maintain or even increase productivity as you're describing. Let me pivot now that we've heard a bit about the report itself and ask you about the reception of the report mentioned earlier. This report can inform policymakers, corporations that you engage with, that can inform McKinsey's own practice. So now that the report has been published, how's this changing the conversation within your consulting colleagues at McKinsey? We are seeing a lot of interest from different types of clients and actually across the world, not just in one region or the other. I would say by far the biggest interest in this topic seems to be from financial institutions. And I think that's because the sorts of questions they're asking us is the research has identified adaptation needs around the world. Where are those needs starting to translate into real value creation, value pools that are being formed today? And where are they clear demand signals for that adaptation for those kinds of adaptation responses around the world? Where are the commercial opportunities as a result of that? And where are their newer commercial opportunities where innovative financing better partnerships across the real economy and financial institutions can unlock financing? So those are very real life conversations. And this is everything from banks in Asia to banks in Europe to private equity companies in the US. Huge host of financial institutions interested in this. The second is real economy corporates. I think this is obviously a large part of our core client ways. I think what's been interesting as we've worked with a lot of companies on this topic, which our bias tends to be large fortune 500 companies, of course. But what we find is that at least in terms of their direct exposure, many of them are actually quite well protected. So they're doing adaptation without calling at that. And that's just because of the design standards that they've set for themselves. So if I have a large physical facility, oftentimes their design not just for that 100, 100, 100 year flood that I described, but one in 10,000 year flood, for example. So even factoring in changing climate, they're quite well protected. Where they take them. tend to have gaps is often in their supply chains, in their distribution channels, in when it comes to their labor and their employees, thinking about heat management protocols, for example. And so that's where they're really now starting to say, how do I make a holistic assessment of my exposure to physical risk, not just today, but in the future? How do I then think about managing that? The other type of conversation we're starting to have with many real economy companies is what's their role in providing the products and services to support adaptation. And what will can they play in better products, better supply chains, better services, lower cost, improving affordability, things of that kind? - So as we bring ourselves to a close here, let me just have two more questions for you. At a high level, how would you summarize the key takeaway messages you'd like listeners to glean from the publication of your report? - So I would say the world has many proven cost-effective adaptation measures, but that's not a guarantee that adaptation will happen. We're already seeing a resiliency gap today of the four billion people exposed around the world to hazards today, only one billion are well protected, and the need for adaptation will only rise with a changing climate. Our estimates would suggest that to see the world would need to spend $1.2 trillion a year with the vast majority of that going to heat and drought. And so the real question is, how do we use this understanding of adaptation needs and costs to better unlock adaptation spending around the world? And the answer is not just finance, it's really how do we spur demand for adaptation, how do we improve risk awareness, how do we educate on the benefits of adaptation, and then how do we get finance to flow? - Great. And final question, for those interested in learning more, clearly they should read this report, and we'll link to it in the show note of this episode. What other resources would you point folks to? - Yeah, so a few that I would highlight and this is by no means comprehensive. There's another great podcast actually exclusively on adaptation called America Adapt, so that would be interesting, especially for people based in the US. There is a great website called We Adapt, which has a whole repository of case studies on adaptation that I always find really interesting to look at. There's also a great resource by an organization called Probable Futures that has created these great maps of climate hazards around the world and that really allows users to explore how their location, their particular part of the world is going to be exposed to these hazards, and they're also starting to talk now more about adaptation responses. So those would be just three, but first and foremost, read our research. - Very good. Yes, we had Probable Futures on the podcast before. We'd link to that episode as well. - Make a lot of thank you so much for joining us here on Climate Rising and sharing your insights about adaptation and this relatively recent report from McKinsey. - It was a pleasure to be on like, thank you so much for having me. - That was my conversation with Make a lot of Krishna, partner at McKinsey and company. You've been listening to Climate Rising. I'm your host, Mike Taufel. Sophie Wong produced today's episode. Craig McDonald is our audio engineer. We'll be back in two weeks with another episode of Climate Rising. See you then.