Climate Change and Inequality

Can climate change actually increase global inequality?

Climate change and its implications on inequality

It has become part of our everyday reality that climate change is happening. We are now just entering the era of increased climate hazards and risk, where the cumulative emissions of yesterday are beginning to cause today’s challenges.

The EU has estimated that in almost all modelled GHG emissions scenarios, climate change is going to cost the EU hundreds of billions of Euros annually by 2050 if serious climate action is not taken. While the Paris Agreement was a good start for international climate cooperation, so far very little actual progress has been made, meaning that it is likely that risks associated with climate change will be realized. This will result in a potential 2.8°C warming by the end of the century, double of what was agreed in Paris in 2016.

Recent research has shown that climate change will impact economies worldwide, with some countries, who may have been the least responsible, being hit significantly harder than others. This vulnerability to climate change by impoverished nations may aid in developing a vicious cycle, illustrated below.

Disadvantaged groups often have a disproportionate amount of their assets invested in housing, livestock or crops within a single region, and this further exposes them to climate-related events, such as hurricanes.

Their asset loss and inability to recover leads to further impoverishment and ability to recover after a climate hazard and further leading to the inequality gap growing between the advantaged and disadvantaged groups, illustrated in the three graphs below. This can also happen inversely, where because of financial and political safety nets advantaged groups can recuperate from a climate event much faster than disadvantaged groups.

As the next climate hazard occurs, this cycle continues, increasing the vulnerability of disadvantaged groups which can potentially lead to people’s displacement from their homes, creating a mass movement of people and climate refugees.

Real world examples of climate events

Pacific Islands. The level of exposure to climate risk primarily has to do with the geographical nature of dwelling and work within the area under study. For example, Pacific Island nations relocating entire communities because of rising oceans.

United States. And, inversely, the wealthy continue to build beachfront property at risk from hurricanes and rising sea levels on the East Coast of the U.S., while being protected from disaster by federal funding and insurance money.

Puerto Rico. Once exposed to a climate event, disadvantaged groups are often disproportionately affected by it. For example, Puerto Rico, which has suffered significantly more than other U.S. regions in recent hurricane seasons. Disadvantaged groups, particularly those related to poverty, typically have less study and diversified assets. More affluent households can diversify their assets financially and spatially, reducing their vulnerability to climate hazards.

New Orleans. A well-documented example of climate events leading to inequality occured in New Orleans in the wake of Hurricane Katrina, which displaced hundreds of thousands of households. After the storm, African American communities did not see the same level of public effort towards their neighbourhoods as compared to more affluent neighborhoods, leaving them abandoned, further decreasing the property value and with it recovery investment efforts.

After the occurrence of climate events, the disadvantaged and the advantaged can recover differently due to different political and financial means (such as insurance). Disadvantaged communities’ inability to recover due to disproportionate asset loss, climate disasters can often cause these inequalities to become even worse.

This broadening of the inequality gap between advantaged and disadvantaged groups highlights the need to flip the script and start a virtuous cycle, in which this inequality is diminished. Developing a virtuous cycle to attempt to close this gap will require local solutions and a significant amount of financial and political effort.

Sustainable finance, a fundamental driver for change!

A fundamental reshaping of finance is taking place with more focus on long-term goals and increased risk management taking into account material environmental, social, and governance risk. Awareness of this is changing and growing fast. Evidence on climate risk, as an investment risk, is such that the financial sector at large, e.g. banks and insurance companies, are reassessing their core assumptions and models which in turn will affect any government, municipality, and company.

Green and social bonds, a part of the sustainable financing family, are instruments which have been developed as a relatively new asset class, allowing investors to invest in, for example, green climate change mitigation or adaptation projects as well as social affordable housing and access to education, with a fixed rate of return.

In Iceland, Landsvirkjun, the City of Reykjavík and Reykjavík Energy were the first Icelandic issuers green bonds. They funded projects such as renewable energy projects, infrastructure upgrades of electrical/heating distribution systems, and clean transportation projects.

Funding these climate-related projects plays a key role in helping reduce inequality due to climate change. In addition, Landvirkjun became the first company in Iceland to be granted a sustainability-linked loan of which the interest rate margins are linked to its performance relating to the environment, gender equality, and health and safety of its employees and therefore positively impacting inequality.

Another island country, Fiji, became the first developing country to issue green climate bonds in 2018, issuing USD 50 m in green bonds. The Fijian government intends to use these funds to finance projects related to infrastructure such as the development of clean water supply, improved waste management, and climate risk-related projects such as cyclone rehabilitation funding and the installation of cyclone-resistant solar homes as a source of resilient green energy.

These are just a few examples in which companies and investors at large can help support and embrace the transition to sustainability with purpose and without sacrificing long-term profitability.

How CIRCULAR can help

CIRCULAR can assist companies in the following way:

  • Strategies: help form holistic and material sustainability/ESG strategies to decrease climate risk as well as identifying material social indicators in your operation

  • Sustainable products and services: help decrease environmental life-cycle impacts as well as structuring initiatives for a more responsible value-chain

  • Impact reporting: help communicate climate and social initiatives to maximise internal and external stakeholder engagement

  • Sustainable finance: help identify opportunities for sustainable financing

  • Contact.