Climate change is a systemic risk. It is impacting all aspects of the global economy and poses challenges to each and every business — large or small.
Climate-related risks are categorized into two groups: physical and transition risks. Physical risks are those linked to extreme weather events and changing long-term climatic conditions. Transition risks are those produced by efforts to shift the global economy to a low-carbon model.
Both physical and transition risks are projected to become more severe and frequent in the years to come. In this blog, we highlight some of the key ways in which these risks will affect businesses in the short, medium, and long term.
1. Impairment of physical assets
Climate change is giving rise to acute physical risks, such as extreme weather events, as well as chronic risks — including sea-level rise and long-term shifts in temperature and rainfall patterns.
Both subcategories of risks are already affecting physical assets, like residential and commercial real estate. Property holders in coastal regions lashed by floods and storm surges are seeing their financial value erode. They are also finding it increasingly difficult and more expensive to obtain insurance. For example, clothing business Under Armor recently told the US Securities and Exchange Commission that the cost of its new flood and property insurance policies surged 26% because of a rise in climate-related natural disasters.
Banks and asset managers that hold financial assets backed by physical property subject to acute and chronic risks may also incur losses if the value of this collateral drops. This could lead institutions to rapidly sell depreciating assets, injecting volatility into financial markets.
Economic sectors that rely on physical laborers — like utilities and mining — could also suffer from reduced worker productivity as chronic risks take hold. Longer and more severe heatwaves are becoming more common as the climate changes, reducing the efficiency of those outdoor workers crucial to the maintenance of electrical power infrastructure and the operation of mining equipment.
2. Increased costs
Physical and transition risks will alter the supply and demand of certain commodities and transform supply chains. Both impacts are likely to saddle businesses with increased costs.
In some jurisdictions, greenhouse gases themselves have become a commodity that businesses are charged to emit. This is true in the European Union, where utilities, manufacturers, and other industries have to buy emissions allowances to use fossil fuel energy.
Certain metals and minerals are also becoming more expensive and volatile due to the growing demand for electric vehicles (EV) and advanced batteries. This could be a boon for some mining companies supplying these minerals.
Supply chains will be disrupted by climate-related extreme weather events as well as changes in how transportation, warehousing, and materials companies operate as they shift to a low-carbon model. This may force certain businesses to rethink how they procure raw materials. Real estate companies, for instance, may have to switch to low-carbon cement and steel manufacturers if they want to fulfill their own climate goals. Such materials may cost more than traditional, carbon-intensive versions.
3. A changing regulatory environment
Climate-related regulations are one of the many transition risks businesses should be aware of moving forward. These include rules focused on reducing businesses’ emissions, like carbon pricing and energy efficiency standards. Complying with these rules requires companies to have to train or hire employees with relevant expertise and develop new ways of working.
Then there are regulations making climate-related financial disclosures mandatory. Such rules are already in place in the UK and New Zealand and are in development in the US, Canada, the European Union, and many other jurisdictions. In order to produce meaningful disclosures that meet the standards set by these regulations, companies will have to establish strong climate risk governance processes and develop sophisticated climate risk management practices and processes. This will lead to widespread organizational change.
4. Increased Customer and Investor Scrutiny
Businesses’ customers and investors are becoming increasingly knowledgeable about climate risks. As a result, they are demanding that businesses develop climate strategies and get to grips with the specific physical and transition threats they face.
Climate Action 100+ and the Institutional Investors Group on Climate Change are examples of investor-led efforts to incentivize non-financial companies to reduce their climate impacts and transition to low-carbon ways of operating. These groups represent vast pools of capital, giving them power over companies that want to be seen as attractive investments. Through their investee engagement activities, they can push companies to alter their behaviors — or risk divestment.
Large companies are also putting pressure on the businesses they purchase goods from to become more climate-friendly. In some cases, this is because these large companies have set internal climate targets that they can only reach if they decarbonize their supply chains. US retailer Walmart, for example, launched Project Gigaton to engage its suppliers in climate action. To date, the project has signed up 2,300 companies.
In response to customer and investor scrutiny, many businesses have also banded together in climate-related initiatives set up by nonprofit and environmental groups. These are intended to help members set and achieve climate targets. The RE100, for example, is a global corporate renewable energy initiative bringing together hundreds of large and ambitious businesses committed to 100% renewable electricity.
Manifest Climate can help
How can businesses adapt to these changes and even thrive throughout them? We can show you how to manage climate risks and maximize opportunities. We are a climate intelligence SaaS platform that combines cutting-edge technology, an industry-leading database of climate disclosures, and ongoing support from climate experts to deliver best-in-class climate guidance at scale.
We provide an easier, faster, and more cost-effective way for organizations to build climate competency, stay on top of key climate trends and the climate-related performance of peers, understand how to improve their climate actions and disclosures and build resilience to the impact of climate change on their business.