More than 4% of GDP could be lost annually due to the physical impact of climate change, if temperature increase exceeds 2°C, with developing nations significantly more exposed and less prepared, according to a new study released by S&P Global Ratings.

For the report, “Lost GDP: Potential Impacts Of Physical Climate Risks,” S&P Global examined a series of climate scenarios for projected greenhouse gas emissions and temperature changes, assessing the potential exposure of 137 countries to economic losses caused by the physical impacts of climate change, focused on seven specific climate hazards, ranging from extreme heat and flooding to wildfires and storms.

S&P Global noted that the report comes as natural disasters are already leading to greater economic impact, with statistics provided by Swiss Re revealing a 5% – 7% annual growth in annua insured losses from 1992 – 2022.

Under a “slow transition” scenario in which temperature increase is anticipated to reach 2.1°C by 2050, the report indicates that up to 4.4% of the world’s GDP could be lost annually,, absent adaptation measures, with the bulk of the impact – roughly 60% of the total – driven by water stress and extreme heat, which in combination could result in depleted water resources, increased energy demand, disruption to agricultural production, and a greater risk of wildfires.

The report found that developing regions would be substantially more heavily impacted by climate hazards, with lower income countries 4.4x more exposed to climate risks that their wealthier counterparts, and less prepared to address economic losses.

Under the slow transition scenario, the report found that South Asia has the greatest exposure to climate change, with approximately 12% of GDP at risk annually by 2050, followed by Sub-Saharan Africa, and the Middle East, and North Africa (MENA), each with 8% of GDP at risk, while GDP at risk in North America and Europe is under 2%.

The report also utilized a readiness assessment metric, measuring the ability of countries to avoid, respond to, and recover from physical climate risks, which found that North America and Europe, the least exposed to physical climate risk were also by far the most prepared, while Sub-Saharan Africa is the least prepared region to face losses from climate hazards, and lower income areas broadly scoring well below their higher income peers.

While noting the need to invest in climate adaptation to address these risks, the report also notes barriers to funding adaptation measures, with most adaptation finance provided in the form of debt instruments, while finance conditions are tightening, and may become worse in an environment of higher interest rates.

Click here to access the S&P Global Ratings report.