Climate change burdens middle class

UBS has conducted a study to investigate the financial impact of climate change and the consequences for the global middle class. To this end, the study examined the consumption behavior of the middle class in 215 cities worldwide. It contrasted consumption patterns with the risks of climate change for the cities in question. The study concludes that people in cities most at risk from climate change, such as Los Angeles, Tokyo and Shanghai, have strikingly different spending priorities. In each national comparison, the middle class in these cities spends between 0.6% and 0.8% more on housing. In the US cities particularly affected by climate change, middle-class residents spend between USD 800 and USD 1,600 per year more, compensating by spending relatively less on luxury goods, entertainment and household durables.

Nearly a quarter of the global population lives in the world's major metropolises, which generate around half of global GDP. This concentration of people and wealth in urban centers is of great importance not only for the domestic economy, but also for globally active companies and investors. Most of the global middle class lives in Southeast Asia, the region with the fastest growing urban population in recent years.

The costs of climate change
The financial cost of climate change-related events to governments and taxpayers is already being felt because, despite the increasing risk of natural disasters, the global middle class is inadequately insured. In the U.S., where insurance coverage is highest in the areas covered by the study, 32% of all weather-related losses are still uninsured. People who do not have access to insurance coverage therefore rely on the safety net established by the U.S. government, which in turn has economic consequences for taxpayers: Between 2011 and 2013, the cost in the U.S. of federal disaster assistance for losses from hurricanes, floods, and droughts was USD 136 billion, or nearly USD 400 per household per year.

In the less developed as well as the emerging countries, the middle class is generally underinsured. Thus, insurance penetration in emerging markets is extremely low compared to property and real estate (e.g. 0.12% in China and 0.07% in India).

Incisive measures necessary
In 2000, nearly half of the world's 6 billion inhabitants lived in cities, and the United Nations expects this number to rise to 60% by 2025. This migration movement triggered by climate development holds enormous potential for conflict.

The U.S. Department of Defense believes that climate change will further "fuel" the already volatile risk situation and could exacerbate existing hostilities and tensions. Example: While there is extensive media coverage of Syrians fleeing war and economic collapse to Europe, the extreme drought from 2006 to 2011 is worth a side note at best. In just five years, Syria lost 85% of its livestock and experienced plummeting crop yields. As a result, the food situation deteriorated among children and 1.5 million rural residents sought their salvation in the city. These living conditions led to protests that culminated in today's civil war.

Temperature increase and mortality
Studies have shown that when temperatures rise above 30 °C, humans struggle to adapt to the new conditions and mortality rates increase. In 2015, nearly 25% of the cities analyzed in the study had a mean annual temperature above 20 °C. According to a study conducted over a ten-year period in 15 European cities, just a 1°C increase above the respective mean temperature in summer causes an estimated 2-3% increase in mortality.

In the long term, temperatures are likely to climb to levels that will not only be problematic for people's health, but will also strain - and potentially damage - physical infrastructure. Given global interconnectedness, even local climate-related incidents have potential impacts on the global economy.

From knowledge to action
However, the study also concludes that the global middle class is becoming increasingly aware of this issue and is beginning to adapt to climate change, even if this adaptation process is still quite hesitant and sporadic. Given the political and social importance of the middle class, increasing economic vulnerability may force policymakers to adopt more innovative policies. But whether investment and innovation will be enough to preserve the prosperity and status of the middle class remains to be seen.

The study is available in full at www.ubs.com/climatechange.