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The top cities facing extreme climate risks in the Global South are New Delhi, Manila, Jakarta, Lagos, Mexico City, Beijing, and Shanghai. Putting aside the climate justice hat, it is reasonable to expect that those in the Global North may not perceive the importance of this news as urgent. It is more concerning to see climate change-induced calamities hit much closer to home, with an economic impact of well over 10 billion euros, Toronto with an economic impact of over US$1 billion and Florida, where the economic loss is expected to be a staggering US$85 billion.
However, should the lack of climate adaptation activities—the ability to adjust to actual or future projected climate—in the Global South be an equal concern?
As per the risk report published by Verisk Maplecroft, 99 out of the 100 cities facing the greatest climate risks are in Asia. Asia and Africa topped the list of regions where climate change is most contributing to higher temperatures, increasing the likelihood of storms, droughts and flooding, leading to an impact on economic growth and the quality of life.
The United Nations Environment Program Climate Change report in 2021 stated that the Global South experienced an increase of 20 percent in climate-related disasters compared to the previous decade.
The Intergovernmental Panel on Climate Change Sixth Assessment Report indicates that the frequency and intensity of extreme heat waves have increased by 2.5 times in many parts of the Global South since the 1950s. The United Nations Environment Program Climate Change report in 2021 stated that the Global South experienced an increase of 20 percent in climate-related disasters compared to the previous decade.
Would the Global North be impacted by climate change in the Global South?
Why should this be of any consequence to the Global North, which is proudly transitioning to a Global North-first policy? There are enough challenges, such as access to affordable housing and healthcare, public safety, employment and illegal immigration. Why should the future of the cities in the Global South be the topic of discussion? Why should it find space in the agenda of board rooms or a strong platform in the legislature?
As the famous saying goes—“When money is at risk, even the most indifferent will suddenly become intensely interested.” Ceteris paribus, here are three economic reasons the Global South, which is set to double its urban population by 2050, is of economic importance and consequence to the Global North:
1. Foreign direct investment at risk
There are significant inflows of Foreign Direct Investment (FDI) and capital imports from the Global North in the Global South cities that are most at risk. As per the UNCTAD (UN Conference on Trade and Development) World Investment Report 2024, the developing countries in Asia, Africa, Latin America and the Caribbean received significant inflows of FDI of about US$866 billion representing 60 percent of the total global FDI of US$1.3 trillion. These investments are primarily directed towards manufacturing, technology, and infrastructure development.
A great example of such an investment is that, by some estimates, Apple and its suppliers such as Foxconn have invested between US$1.5 billion to US$2 billion in India. This accounts for the supply of about 14 percent of all its iPhones produced in India and valued at US$14 billion. In fact, starting in late 2024, Apple will diversify its supply chain and also produce AirPods in India. Using a visual metaphor, if the Global North was an individual or a corporation with US$1.3 trillion invested, then over 60 percent of its portfolio would have been allocated to cities in the Global South. Thereby, resulting in significant exposure to any physical risk posed by climate-related activities in the Global South.
The Global North could choose to reduce its FDI and capital exports to the Global South over some time to manage its risk through this exposure.
The Global North could choose to reduce its FDI and capital exports to the Global South over some time to manage its risk through this exposure. However, such action may impact the inward FDIs to the Global North from the Global South, which was responsible for US$459 billion, representing 25 percent of the total FDIs as per the UNCTAD Handbook of Statistics 2023. Besides, the Global North will be hard-pressed to find similar cost efficiencies outside the Global South, without impacting its bottom line or increasing the price.
2. Global North supply chains under threat
Countries in the Global South export a diverse array of goods, from raw materials to manufactured products, to the Global North. For example, coffee is produced primarily in the Global South, in the countries of Brazil, Colombia, Honduras, Guatemala, Ethiopia, Uganda, Vietnam and Indonesia. Climate change is threatening coffee quality and yield, and posing risk to coffee supply unless climate adaptation activities are undertaken. This means that almost all the US$40 billion industry and one’s daily cup of coffee are at risk because of climate change in the Global South.
In 2021, exports from the Global South amounted to over US$5.6 trillion. While Africa and Latin America exported primary commodities like minerals and agricultural products, Asian countries such as China and India were major exporters of manufactured goods. This dynamic has made the Global South an integral part of global trade networks. Climate change in the Global South will lead to disruptions in production, supply chain risk, and changes in the quality and availability of products, thereby increasing the cost of doing business for enterprises. This cost would ultimately be passed onto the end user resulting in a higher cost of living.
3. Quiet erosion of productivity and livelihood
While it is hard to estimate the distribution of expected deaths by age because of climate change, according to the International Labour Organisation, it is estimated that rising temperatures, declining air quality and increases in flooding, especially in outdoor and labour-intensive industries, will reduce global working hours by 2.2 percent. This adds to a US$2.4 trillion loss or 80 million full-time equivalent jobs in the global gross domestic product (GDP). The countries most affected include those in South Asia and Sub-Saharan Africa, where agricultural and outdoor activities are prevalent. Again, to contextualise, the aforementioned loss would equal the annual GDP of Canada, Italy or Brazil.
The combined effects of productivity losses and infrastructural vulnerabilities due to climate change are expected to slow GDP growth across the Global South. According to the McKinsey Report on climate risk and response, studies suggest that GDP losses from climate impacts could reach 15-20 percent by 2050 in some regions, particularly affecting Africa and Southeast Asia, where economies are highly dependent on agriculture and natural resources. The World Economic Forum went as far as estimating that flood risks alone could cause economic losses of US$4.3 trillion annually by 2040 unless addressed, with a majority of these losses in the Global South.
The combined effects of productivity losses and infrastructural vulnerabilities due to climate change are expected to slow GDP growth across the Global South.
The health and life of individuals that are responsible for producing the goods and services for the Global North, and the individuals who are purchasing the goods and services from the Global North would be gravely affected because of climate change. To come full circle, this would ultimately also threaten the return on the FDI from the Global North while further increasing the cost of doing business for companies from the Global North.
What can the Global North do?
There is a strong case for the equitable and sustainable reasons to fund climate adaptation activities in the Global South. There is an equally compelling financial reason that threatens to directly and negatively impact the cost of living of every individual in the Global North without sufficient climate adaptation activities. With such compelling arguments, why did climate adaptation financing only account for US$63 billion dollars in 2021-22 of the US$212 billion needed per year by 2030 for developing countries alone?
Private capital’s active participation is needed due to the capacity constraints of public capital, along with the technical expertise and efficiency that private capital brings to the table. US companies alone are sitting on a cash stockpile of US$4.6 trillion dollars and private equity is hoarding US$2.4 trillion dollars of cash at the moment.
Why isn’t private capital from the Global North stepping in to bridge the gap?
The answer lies in the ability to capture the value being created and justify the investment to one’s stakeholders. Traditionally, climate adaptation activities are viewed as a public good and perceived to be the responsibility of the government. The government is creating value by spending, maintaining and protecting public infrastructure for individuals as they live and work, with the hope that the future will be better than the present. The government is capturing value through taxes, raising capital through securities instruments based on past performance, and delivering well-being to the citizens who vote to keep the ruling party in power.
Investment in climate adaptation activity in a tiny village by private capital will create value for the residents, but may not always capture value for private capital.
Private capital’s key north star is the ongoing patronage of existing customers, the acquisition of net new customers, and protecting the supply chain that creates and moves goods and services to ensure a return on invested capital. Investment in climate adaptation activity in a tiny village by private capital will create value for the residents, but may not always capture value for private capital. Unless, however, the residents directly contribute to the supply chain, consume a significant portion of the goods and services, or if private capital’s lack of action puts the patronage of existing or future customers at risk. Take, for example, the recently announced US$500 billion dollars investment by OpenAI, Softbank, and Oracle to build artificial intelligence (AI) infrastructure with data centres starting in Texas. The private sector has a vested interest in investing in the Texas economy to create value through 100,000 jobs and tax contributions, as they have the means and confidence to capture value through charging subscriptions to customers who would like to utilise AI computational power to achieve cost efficiency.
Short of passing mandatory policy to force private capital participation, there is a need to provide private capital with an easier ability to assess the value creation and ensure value capture through targeted climate adaptation activities.
There is a huge opportunity to create funding models, similar to PACE (Property Assessed Clean Energy) financing models used to decarbonise infrastructure, that can raise and administer capital from the Global North and report on and recover capital in the Global South to fund climate adaptation activities.
Aaditya Tangri is a Non-Resident Contributor (Research) with the Centre for New Economic Diplomacy at the Observer Research Foundation
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