An old Wall Street adage says “the market hates uncertainty.” Well, businesses received an unambiguous message last week with the latest Intergovernmental Panel on Climate Change report.
With growing certainty, the IPCC re-affirmed the science of climate change and human being’s central role to it. The report, which draws on input from 800 experts from 40 countries, confirms that the world is warming faster than expected, with climate-related impacts on the rise. One top takeaway is that, according to the latest figures, the world has just 30 years until it has used up its “carbon budget,” based on carbon-intensive trajectories. If we exceed this budget, we will no longer have a good chance of staying within 2 degrees Celsius of warming.
What does this mean for business? In short, climate change is bringing greater risks and investment challenges, but also smart responses can deliver economic benefits in the transition to a low-carbon economy.
Mounting Risks: Extreme Weather, Rising Seas
Higher temperatures and more extreme weather are among the most apparent business risks. At the World Economic Forum in 2013, financial experts named climate change as one of the top three business risks.
From raging wildfires to severe flooding, extreme weather and climate change imperil operations throughout a company’s supply chain. The recent torrential floods in Colorado are a stark reminder of what our changing world looks like. The flooding took eight lives, impacted 20,000 households, and already cost more than $500 million dollars. Related damage to oil and gas facilities in Colorado is an ongoing concern for businesses and local residents.
Warmer air and melting ice are also leading to rising seas that threaten shorelines. According to the IPCC, sea levels have likely risen nearly twice as fast as previously reported. More than 1 billion people worldwide, along with many financial centers, are located in low-lying coastal communities. According to the OECD, average flood losses in major cities around the world could exceed $52 billion per year by 2050, and possibly go as high as $1 trillion without additional protection. Consider Hurricane Sandy which swamped New York City with 13-foot storm surges and delivered more than $50 billion in damage.
Water risks, of course, cut both ways with some regions facing more water scarcity than flooding. In CDP’s Global Water Report last year, more than 50 percent of companies cited “detrimental” water-related business impacts as one of the top risks, with costs as high as $200 million for some companies.
Climate change and extreme weather also threaten our energy and electricity infrastructure, disrupting production, delivery, and storage of energy. All of the major U.S. power sources depend on water, and decreased water availability due to changing precipitation trends and warmer water threaten operations. The U.S. has more than 280 power plants, oil and gas refineries, and energy facilities located in low-lying areas vulnerable to sea level rise and flooding, posing additional threats to our domestic energy supply.
Investment and Insurance Risks
Climate-related economic disruption also compounds risks to global investments. Climate impacts are going to surface very differently depending on the location and some are highly variable thereby posing a serious risk to investors. A 2011 Mercer study warned that climate change could increase investment-portfolio risk by 10 percent over the next two decades.
The IPCC’s carbon budget has major implications for fossil fuel companies, traditionally among the highest grossing investments. These stocks underpin large portfolios and pension funds, but their value is based on proven reserves. A large portion of the reserves will likely need to remain untapped in order to keep within the carbon budget, creating the risk of rapid devaluation.
Extreme weather events are having a disruptive impact on the insurance industry. As damage from extreme events pile up and sea levels rise, insurers face the tough choice either to hike rates or refuse to provide coverage in disaster-prone areas. Some of the increased costs are being passed onto businesses and consumers. For instance, following changes in the National Flood Insurance Program, businesses and homes in high-risk flood zones will start increasing by as much as 25 percent per year, as Time magazine recently reported.
Climate Action Can Have Economic Benefits
While rising climate threats present clear risks to business, smart responses could bring economic benefits as well. In a 2010 report by the UN Global Compact, more than 86 percent of businesses named responding to climate change as an opportunity.
In fact, many multinational corporations are already taking steps to reduce risks and lower their greenhouse gas emissions. Wal-Mart is driving emissions reductions throughout its supply chain, while generating the most on-site renewable energy in America. Coca-Cola is phasing out the use of climate-polluting hydrofluorocarbons. And, Google has committed to invest $1 billion in renewable energy projects.
Renewable energy is the fastest-growing power generation sector in the world, on pace to comprise one-quarter of the electricity mix by 2018. Transitioning from fossil fuel toward renewable sources of electricity generation can bring significant job growth. According the U.S. Bureau of Labor Statistics, in 2011, there were already more than 3.4 million “green jobs” in the United States. Globally, clean energy investment in 2012 was $244.4 billion, which was down from the previous year, but still nearly a five-fold increase compared to 2004.
What’s the bottom line? Climate impacts have arrived, but businesses still have choices. One thing is absolutely clear: No CEO can afford to ignore the growing certainty of climate change.