The climate crisis is changing the way we live and the way we work. In 2019, the UN’s International Labour Organization reported that 80 million jobs would be at risk if rising temperature predictions materialize, with productivity impacted by unlivable working environments.
Almost all industries are threatened by the effects of climate change, either directly or indirectly. One 2019 study has shown that the U.S. alone could lose USD 520 billion across 22 sectors due to global temperature rise.
For companies thinking about the ways the changing climate might affect their business, the risks fall broadly into three types: physical, transitional, and liability risks.
Physical risks
The physical risks of climate change are those immediate threats that come from the physical environment. Flooding, hurricanes, drought, wildfires – these are all symptoms of the climate crisis, and can all cause physical damage to people, property and transport links. Major weather events <a have increased in direct correlation to the warming climate. Between 2000 and 2015, the global population at risk of flooding increased by 20-24 percent, while at the same time 700 million people are at risk of being displaced as a result of drought by 2030, according to the WHO.
Major weather events are already having an impact on business: 2017’s Hurricane Harvey was one of the costliest storms to hit the U.S., causing USD 125 billion of damage, while losses from drought currently cost the EU and UK around EUR 9 billion per year, and are projected to rise to EUR 65 billion per year if global warming is not curtailed.
The agricultural sector is particularly exposed to physical risks. Both flooding and drought can pose a risk to crops and livestock, as do extreme cold and extreme heat. The Australian Bureau of Agricultural and Resource Economics reported that more than AUD 1 billion dollars have been lost by farmers in the 20 years to 2019 as a result of the changing climate, largely from drought.
The leisure industry, too, is another sector at immediate physical risk from climate change. Ski resorts are seeing shorter seasons as rising temperatures reduce snowfall: almost all U.S. ski resorts could see a 50 percent shorter season by 2050, and up to 80 percent by 2090. While the U.S., Turkey and Australia are all losing tourism income as wildfires make large and popular hiking regions unsafe – a situation exacerbated by the COVID-19 pandemic that highlights how global risks are interconnected.
Traditional risks
Transitional risk comes from the potential cost to businesses with the introduction of policy, laws, and other regulations designed to address climate change. Transitional risks can also arise from changes in technologies and consumer trends, which may also lead to reputational risk as wider society changes its view on ethical business practices. And as sectors move away from activities that contribute to climate change, they risk being left with stranded assets – a piece of land, property or equipment whose value has deteriorated.
The energy industry is one sector particularly open to transitional risk. With the push for greener energy sources, governments are increasingly shifting to a reliance on renewable energy sources, and demanding net-zero carbon emissions from energy producers. With a combination of the pandemic, a push for clean energy and uncertainties associated with carbon pricing, profits in 2020 were down across the sector.
The mining sector is also open to transitional risk. Precious metal mining, for example, could be at financial risk from policies that introduce carbon pricing. The negative effects of mining on the climate and the environment are increasingly becoming a reputational issue for mining companies, with investors nervous of businesses that could cause reputational harm by association.
Liability risks
Liability risks arise from a failure to mitigate, adapt to, disclose, or comply with changing legal and regulatory expectations. Climate litigation is increasing worldwide, reflecting advances in attribution science, evolving legal disputes, and changing public sentiment. It is also being driven by a greater focus from regulators and investors wanting to ensure businesses provide necessary disclosures and comply with an ever-evolving regulatory landscape.
Companies that pollute are obviously exposed to potential litigation. But so are companies that fail to consider future climate change in their products and services. For instance, structural engineers or property developers that fail to consider increased intensity of rainfall in design of drainage systems.
Amar Rahman, Global Head, Climate Resilience Services at Zurich Resilience Solutions, Commercial Insurance, says: “Any company is impacted by different proportions of these risks – physical, transitional and liability risks. Some industries will be more worried by regulatory requirements, while others might be more concerned by the loss of assets through physical damage. But companies should consider all these risks, both short and longer term.”
How to respond to these risks
There are well-established methodologies and risk management approaches to help businesses build resilience against climate risks. They essentially cover three steps:
- Identify the broad business and strategic risks
- Develop a granular view of the risks involved
- Develop a mitigation strategy
It requires a significant shift in the way companies manage their approach to climate resilience and adaptation. Climate risks should be considered core business risks, and their mitigation part of business strategy. As the effects of climate change, and the risks they pose, are ever-changing, analysis for risks should be regularly carried out. These steps could lead to investing in new technologies or moving into new areas of the industry.
Some of the biggest names in energy are rapidly pivoting in these ways: BP have bought 9 gigawatts of solar energy projects in the U.S., while Exxon has announced an investment of USD 3 billion in carbon capture technology to reduce their emissions.
When facing physical risks, these changes might mean finding new opportunities in the new environment, like the Arosa ski resort in Switzerland, which is developing its summer tourist model to draw in crowds now that they are seeing decreased snowfall in winter. Resorts are also embracing technology, such as cloud seeding, to nudge clouds into dropping snow, and even wind powered snow machines that work at above zero temperatures.
Businesses shouldn’t act alone
Businesses should aim to collectively develop climate risk solutions leveraging the expertise and considering the needs of other stakeholders, including academia, regulators, government bodies and communities.
Insurers can play a key role too. They naturally want to protect their customers and can share their risk management expertise and experience. This year, a group of 22 insurers, including Zurich Insurance Group, came together with the UN to produce a report outlining how the industry can help analyze and mitigate climate risk. The report recommends a more integrated approach that analyzes the physical, transitional and liability risks of climate change all together, an approach that could be adopted by insurers across industries to better protect themselves and the businesses they insure.
Thriving futures
Climate change brings huge challenges, but some industries, such as clean energy providers, can embrace opportunities. According to the International Energy Agency, global renewable energy use increased 3 percent in 2020, compared to 2019, with renewables taking a 29 percent share of global electricity generation compared to 27 percent in 2019.
Innovation in transport, too, will reap rewards. The EU and the UK are two regions planning to ban non-electric vehicles in the next decade or two, so electric vehicle manufacturers are set to profit. Tesla is perhaps the most well-known, but all major car manufacturers are scrambling to create more powerful, reliable electric cars.
From carbon capture to recycling, new technologies that can help us adapt the way we create and use products will be in high demand. Businesses that come up with new ideas to alleviate the damaging effects of existing industrial processes will thrive.
Climate change risks
The effects of climate change are felt around the world, across all industries. Taking steps to mitigate the impact on the climate is vital, but it also makes good financial sense. By taking action now, businesses can lower the risks that come from climate change, and even take advantage of the new opportunities a greener future presents.
As Rahman says, “Companies that identify and act on climate risks now will have a better chance to not only survive but to thrive in a new net-zero world.”