Climate Change and the Social Cost as the Blind Spot

Although it is difficult to establish a direct correlation between natural disasters (such as droughts, floods, heat waves, storms, etc.) and climate change, scientific evidence confirms that the increase in global temperatures increases the probability, frequency (fivefold since the 1980s) and severity of some extreme events. 2024 is the first year in which an average temperature of 1.5°C higher than that of the pre-industrial era has been recorded.

At the same time, the economic cost, i.e. the sum of financial losses directly attributable to a major event and losses due to business interruption resulting directly from material damage, is also increasing at a faster rate (almost 8 times 1 compared to the 1980s). According to initial estimates in December 2024 by the insurance group Swiss Re, the economic cost is expected to reach $310 billion in 2024, an increase of 6% compared to 2023.

However, this may be an underestimate. In low-income countries, it is particularly difficult to assess the impact of climate events, especially slow-onset disasters such as droughts and heatwaves. Furthermore, indirect costs, such as social costs, are not included in this estimate.

These events entail considerable social costs, including human loss and suffering (physical and mental health problems), displacement of populations, loss of cultural heritage and loss of livelihoods. These weather events also increase insurance and health costs. They accentuate existing inequalities, especially among the most vulnerable populations, within and between countries.

These inequalities highlight the urgency of adapting to climate change and underscore the importance of “climate justice”

This concept refers to the impact of climate change on populations, beyond just environmental or physical effects.

In absolute terms, the economic impact is generally greater in high-income countries, as the value of infrastructure and housing tends to be higher. These countries are also more likely to have insurance coverage, which makes the financial impact easier to quantify. For example, early estimates suggest that the Los Angeles fires in January caused economic losses of more than $250 billion, or about 6% of California’s expected 2024 GDP.

Social impacts cause by the climate change are typically higher in low-income countries, although less quantifiable. These populations have fewer assets, less insurance coverage, and generally limited access to public services. For example, Typhoon Yagi, which violently hit Southeast Asia (Vietnam, Philippines, Laos, Myanmar, Thailand) last September, caused economic damage of $12.6 billion across the region, about 4% of the region’s average GDP in 2023. The storm killed more than 800 people, damaged thousands of schools and health centers, and had severe impacts on access to drinking water and sanitation, crop conditions, and access to education…

Another way to address inequalities caused by climate change is to take a closer look at the issue of insurance coverage. In 2024, only 44% of losses from natural catastrophes were covered by insurance. However, the increasing frequency and intensity of these events has led to two important phenomena in recent years: some insurance groups have stopped operating in high-risk areas and insurance premiums have increased in these regions.

For example, following the recent wildfires in Los Angeles, State Farm, the largest insurer in California, sought regulatory approval to increase insurance premiums by an average of 22%. Although the goal was to support the company’s solvency, these measures are often taken to discourage people and businesses from remaining in these vulnerable areas.

However, this situation especially penalizes the most vulnerable populations (to climate change and not only), who cannot afford insurance or relocate. The lack of insurance coverage also compromises the credit profile of borrowers, including businesses, making the reconstruction phase more difficult. It also highlights inequalities between countries.

Indeed, according to data collected by Swiss Re over a 10-year period between 2014 and 2023, the “protection gap” related to natural catastrophes, which refers to the difference between insured and uninsured losses, is much larger in Asia (85%) and Latin America (80%) than in North America (43%). The gap is also significant for the EMEA region (70%), where it is larger in emerging countries than in advanced ones: a deficit of 48 billion dollars in 2023 (+20% compared to 2013) versus 26 billion dollars (+13%) respectively. Indeed, in emerging markets, some regions have almost no coverage for natural catastrophe risks.

Governments often intervene as a last resort to cover the costs of uninsured damage. For example, the Spanish government allocated more than €10 billion to rebuild after the floods that hit Valencia last October. It also recognized the need to implement a long-term plan to transform the area and adapt it to the challenges of the climate emergency affecting the Mediterranean basin.

To prepare for future challenges, governments must take proactive measures to assess vulnerabilities. Together with businesses and investors, they must invest in adaptation and resilience (quality of infrastructure, conservation of vital resources, etc.), which, according to the United Nations, currently account for only 21% of international climate finance.

Governments can also address inequalities by providing financial support to vulnerable populations who live in the areas most affected by climate change. They should intervene by promoting insurance coverage and the creation of microinsurance systems, which would reduce the impact of shocks on public finances. Finally, for companies, it is a matter of adapting their practices to reduce environmental impacts, involving the upstream part of the value chain, workers and local communities to ensure a just transition and help with climate change.

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(Featured image by Markus Spiske via Unsplash)

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First published in ESG NEWS. A third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

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