ESG Essentials for Corporates #4: Loss & Growth: Challenges and Chances of climate change

Scientists have estimated that a rise of our global temperature by 2oC – the temperature increase limit targeted in the Paris Agreement – would result in a 15% drop of the global gross domestic product (GDP) and an increase to 3oC would cause a 25% decline in the global GDP from 2010 levels[1].

In this article we look in more detail at the dramatic financial impact of climate change on the global economy and on businesses specifically, but also share some positives by looking at the enormous growth potential of a transition to a low-carbon society.

Jargon buster

WMO: The World Meteorological Organization is the United Nations’ specialist agency for meteorology (weather and climate), operational hydrology and related geophysical sciences.

The Global Commission on the Economy and Climate: A major international initiative, comprising former heads of government and finance ministers and leaders in the fields of economics and business, to examine how countries can achieve economic growth while dealing with the risks posed by climate change.

ILO: The International Labour Organization brings together governments, employers and workers of 187 member States, to set labour standards, develop policies and devise programmes promoting decent work for all. 

CDP: Carbon Disclosure Project (CDP) is a not-for-profit charity that runs a global disclosure system for investors, companies, cities, states and regions on their risks and opportunities on climate change, water security and deforestation.

Macroeconomic and societal impact of climate change

The Global Commission on the Economy and Climate reported that economic losses globally, triggered by weather and climate-related hazards, added up to $320 billion in 2017[2]. Tropical cyclones, causing floods and landslides, were the most costly among all weather-related hazards attributed to climate change in the years 2015-19, with Hurricane Harvey (in 2017) resulting in an estimated economic loss of more than US$ 125 billion.

Looking at long-term effects, researchers at Stanford University[3] project 15%–25% reductions in per capita output by 2100 if no sufficient measures are taken and, as a result, global warming were to rise to 2.5–3oC. The ILO estimates that 1.2 billion jobs depend on a stable and healthy environment and will come under threat if the 1.5oC target isn’t met[4].

Physical and transitions risks directly impact on corporate financials

53% of the companies globally, which disclose their climate change risks and opportunities to CDP, identified climate-related physical and transition risks that have the potential to significantly impact their business financially and/or strategically[5].

The top physical risks that corporates identified were 1) the increased severity of extreme weather risks which could, for example, disrupt production or cause damage to production facilities and 2) changes to precipitation and weather patterns as well as rising mean temperatures, all of which could become security concerns for businesses if infrastructure is destroyed, ecosystems fail or some regions even become uninhabitable.

Looking at transition risks, the following risk categories were considered to be the most prevalent:

  • Further increase of pricing for greenhouse gas (GHG) emissions
  • Even more penalising regulation (as governments look to meet their Paris agreement targets), making it uneconomical to conduct business in a carbon-intensive way
  • Enhanced emissions-reporting obligations, and
  • Changing customer behaviour

Physical and transition risks directly impact on corporate financials: corporates face higher operating costs due to higher compliance costs, increased insurance premiums, GHG emissions pricing and asset write-offs either as a result of damage to property after severe weather or forced write-offs due to policy changes. Also, while transition risks might appear to take longer before they materialise, events such as the ban on plastic straws announced last year in response to a public consultation in 2018, show that significant changes can happen very quickly leaving little time to adapt.

At the same time, revenues are under threat with production capacities diminishing as a result of the physical impacts of climate change and different consumer preferences hitting those that haven’t yet adapted to the new demand.

And while some might be more affected than others, climate change impacts every single sector. The knock-on impacts of severe weather include disruption to supply chains and distribution channels, and impacts on employees, too. Some examples (which we’ll detail further in future articles of our series):

  • By 2050, heat-related manufacturing losses could equal more than $47 billion, stemming from lower productivity due to extreme heat, components being temperature sensitive, and increasing wildfires leading to severe disruption or even permanent damage and shutdowns[6].
  • Real estate: With the bulk of climate change damage hitting commercial and residential properties, real estate companies have started to engage with specialised climate risk consultancies that go beyond traditional insurance predictions. Based on assessments of flooding, wildfires, wind-related and other disasters, they calculate total exposure as well as specific client exposure on individual buildings. These risk assessments also include business disruptions for property tenants and higher operating and capital costs caused by increased wear and tear on properties from more extreme weather[7].
  • Telecommunication: While the technology sector will see further significant growth, spurred by innovations and heavily data-driven solutions to tackle climate change, the sector is equally exposed to a number of climate risks. Tech UK, the country’s technology body, cited a wide range of climate threats in a climate risks report, including increased water, silt and salt damage due to flooding, scour of cabling and foundations, subsidence to buildings and masts, disruption to fleet operations, cable heave from uprooted trees, higher costs of cooling, reduced signal strength and higher operating costs.[8]
  • Transportation: The transport industry will be vital in supporting new, zero-carbon mobility concepts, which offers new opportunities, but at the same time the sector is heavily affected by climate change and by the COVID-19 pandemic. Extreme weather (and public health) events are disrupting transport routes both inland and on the coasts, and together with climate change-driven changes in sea level, temperature, humidity and precipitation the economic impact is dramatic. Last year, a new international standard, ISO 14090 'Adaptation to climate change - Principles, requirements and guidelines', was published, advising on best practice to design transport solutions for future weather patterns.
  • Utility: Climate change is impacting the core business model of utilities and transforming the electricity market, which will leave some players behind and open the doors for others, particularly renewable generation developers. More extreme summer and winter temperatures are already significantly changing demand for cooling and heating, while flooding, warmer water and air temperatures can all cause a shortage of power supply in the system. We’ll be analysing the future of energy in one of our next articles.

The growth potential of a low-carbon society

While the effects and costs of climate change make for sober reading, there’s widespread agreement that the transition to a zero-carbon society will bring benefits that will far outweigh the costs, with many hailing the process as a golden opportunity to crank-up stalling growth across the globe.

In its 2018 report, the Global Commission on the Economy and Climate determines that we’re “significantly underestimating the benefits of cleaner, climate-smart growth. Bold climate action could deliver at least $26 trillion in economic benefits through to 2030, compared with business-as-usual”[9] – to put that into perspective: $26 trillion is slightly more than a third of the global GDP in 2019. The report concludes that 65 million new low-carbon jobs could be generated by 2030.

While the ILO forecasts a significantly lower number, estimating 24 million new jobs in greener economies by 2030, their message is equally positive: new jobs will more than offset job losses of six million in fossil fuel heavy industries[10].

Only 14 of the 163 industry sectors analysed will suffer employment losses of more than 10,000 jobs worldwide – the petroleum extraction and petroleum-refining sectors would be hit hardest with job losses of one million or more. Top of the list of “sector winners” is renewables-based electricity with 2.5 million new jobs – more than offsetting some 400,000 jobs lost in fossil fuel-based electricity generation. The biggest job creator, however, could be the transition to a circular economy, with six million new jobs in recycling, repair and remanufacture businesses to help keep resources in use for as long as possible.

And there are further elements that can add to the growth story: Smarter urban planning could create more sustainable cities, which could rake in economic savings of up to $17 trillion by 2050 and deliver up to 3.7 gigatons of CO2 savings over the next 15 years[11].

Equally, significant cost savings can be achieved with a switch to a circular industrial economy: For the fast-moving consumer goods (FCMG) sector, materials savings are estimated to be as much as US$ 700 billion per annum, which represents 20% of the materials input costs incurred by the consumer goods industry today[12].

CDP data shows that corporate optimism matches those positive macroeconomic outlooks: The nearly 7000 companies captured by CDP, predict that the potential value of new opportunities arising as part of the transition (estimated at around $2.1 trillion) will be seven times the value of anticipated costs (approximately $312 billion)[13].

Corporates expect that an increased resource productivity – for example by moving to more energy efficient production processes and/or substituting price-volatile fossil fuels with renewable energy sources, as well as a lower material use which, comes with a circular economy approach – will help their bottom line. Equally, they expect their top line to benefit from product and service innovations spurred by the transition, which could attract new customers.  

Commenting on the challenges and chances of tackling climate change, the World Commission on the Economy and Climate summed up the next 10 to 15 years as a “unique use it or lose it” moment in economic history.  

Corporate clients who would like to discuss this topic further should contact:

Varun Sarda, Head of ESG Advisory

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