The Real Cost of Climate Change for Businesses

In an unnerving revelation, the Intergovernmental Panel on Climate Change (IPCC) released the first part of its Sixth Assessment Report (AR6) on August 9, 2021. This is perhaps the most striking warning against the impact of Climate Change issued till date. The changes already set in motion are irreversible – sea levels have risen and global temperatures soared approximately 1.1 *C higher compared to the second half of the 19^th century. The report also highlights the strong correlation between extreme weather conditions and rising temperatures – leading to mass migration, infrastructural damage, disease outbreak, and resource scarcity. This year has already broken temperature records, witnessed widespread wildfires and floods among other natural disasters, in the midst of the Covid-19 pandemic – all of which are attributed directly or indirectly to human activity. As world leaders prepare to meet in Glasgow in November to discuss the insufficient actions taken to curb the impact of  climate change, there is urgent need to shift focus from viewing climate change as an imminent threat to an ongoing global crisis.

The burden of climate change rests equally on every country even though some countries have contributed more in terms of carbon emissions and other pollutants. But there is only so much governments can do to counter this challenge. Reducing the impact of climate change will be impossible without businesses taking action to reduce their carbon footprint.

In this piece, I argue that the costs incurred due to climate change far outweigh any short-term benefits of current practices. There are two ways businesses will incur these costs – first, via increased operational expenses, loss of capital, and supply chain disruptions due to climate change. Second, the financial and legal costs of not adapting to climate change are too high; since the changes are already afoot, they are guaranteed to alter the global economy.

According to a report from the Carbon Disclosure Project (CDP), a not-for-profit charity that runs a global disclosure system for businesses and investors, climate change risks will cost businesses up to US$120 billion in the next 5 years by disrupting supply chains. A prime example of this phenomenon is the increased frequency of wildfires worldwide – in the last year, Turkey, Siberia, the United States, Greece, and parts of India have all experienced extensive wildfires. Approximately 175,000 hectares in Turkey and over 1,416,399 hectares across the United States were burned in 2021 alone. These wildfires were caused by rising temperatures and droughts, and can disrupt or even shut down businesses. Wildfires move quickly; they damage business property and key assets. Agriculture, ranching, real estate, and forestry industries are at risk especially when these fires break out in rural areas. Moreover, the extent of wildfires has broadened and they impact urban areas just as much. Authorities have had to evacuate people from major cities, and their failure has often resulted in large casualties.  L The October 2017 fires in California are an example. The fires broke out near coastal counties and lasted for three weeks. Trade shipments took a major hit. An Amazon Centre near Sacramento had to be shut down, and businesses were insured more than US$ 8 billion in losses. The freight and transportation industry in the region was brought to a complete halt, disrupting trade across the country.

At their core, climate-friendly practices are meant to be more financially viable in the medium-to-long term. According to BCG's Centre for Climate Action, the claim that costs are an obstacle to reducing emissions is increasingly flawed — around 40 percent  emissions across eight major supply chains (food, construction, fashion, fast-moving consumer goods, electronics, automotive, professional services, and freight) can be eliminated with “measures that bring cost savings, or are at costs of less than €10 per ton of CO2 equivalent.” Such changes would not increase end-consumer costs. Around 40 percent of all emissions in these supply chains could be reduced with readily available and affordable solutions. For most industries, a carbon free supply chain would increase end-consumer costs by 1–4 percent  at the most in the medium term. Other affordable levers include fuel switching, i.e., switching to battery-electric or hydrogen powered trucks, or green fuels such as biofuels, e-kerosene or green ammonia for transportation. Similarly, switching to renewable energy for power is achievable through self-generation of wind and solar power or bioenergy. This, in turn, reduces operational costs of businesses in the short and long term. According to EnergySage market data, installing solar as the primary  energy source could help commercial properties in the United States 75 percent  of their energy costs. Moreover, the costs of installing wind and solar power sources have reduced by 70 percent  and 90 percent  since 2009, respectively.

Financially and legally, the costs for remaining a carbon-intensive business are increasing. According to a study published by the London School of Economics, every country in the world now has at least one climate law or policy, and in some countries there are over 20 such laws. Climate lawsuits against carbon majors typically favor the claimant. Between 1996 and 2020, 58 percent  of climate-related cases outside the US had climate-favorable outcomes. This year alone, carbon majors such as Shell, ExxonMobil and Chevron have been ordered by investors and courts to cut their carbon emissions, or pay the price. According to CDP, 226 of the world’s 500 biggest companies are engaging in carbon-pricing or have committed to doing so within the next two years, to avoid climate lawsuits. There is also a significant increase in commercial banks investing in renewable energy projects. These include Sumitomo Mitsui Banking Corporation, Mitsubishi Financial Group, Santander, BNP Paribas and ING, among others. Most of these banks have strong exclusionary policies against financing carbon-intensive fossil fuel projects such as coal mining, coal-fired power plants, and the exploration and production of oil and gas. Moreover, revenue from renewable energy projects is almost guaranteed in the long term. Statistically (according to Goldman Sachs Asset Management data), in the last five years, this sector has offered strong risk-adjusted returns with lower volatility relative to other equities.

In sum, staying carbon intensive could cost businesses billions. By implementing solutions to make practices carbon neutral, businesses will encounter zero-to-marginal costs that will pay off in the medium term. For example, the fashion industry can make immense cost savings with every tonne of Greenhouse Gas Emissions abated. According to a McKinsey report, small changes in the fashion supply chain such as switching to recycled packaging, can have cost savings of up to $4900 per tonne of CO2 abated via this switch in operations.

Most businesses believe that switching to climate friendly business practices is expensive – but that is far from the truth. There is a lack of foresight that predicts the actual risk climate change poses. Businesses operate on profit – and the lack of inaction on their part stems from the perception that green business practices are costly to adapt, and would reduce their revenue. Large corporations are responsible for larger emissions – and change is more difficult to implement within their labyrinthine frameworks. This leads to ineffective policies which are purely nominal, and don’t create any real change. There is also a lack of transparency and general misinformation about the key indicators that businesses can focus on to mitigate their carbon footprint. Eight supply chains are responsible for more than 50 percentof global emissions: food, construction, fashion, fast-moving consumer goods, electronics, automotive, professional services, and freight. A possible solution that governments can collaborate on is to create a database using industry-specific data. Industry- specific targets can be set for these eight supply chains, instead of country-specific targets, and this would be far more effective in abating emissions. Within industries, the burden to decarbonize can be shared by each step of the chain, for example, by implementing a circular model for packaging, implementing ‘green’ requirements for procurement procedures, etc. This would ensure the supply chain’s overall sustainability, without any single corporation having to take the responsibility and forsake its profit.

Decarbonizing is challenging. There is a lack of transparency of data and a lack of trustworthy standards by which to measure sustainability efforts. Businesses don’t know where to start and lack the organizational structure to effectively implement change in business practices. Most also lack a thorough knowledge of climate-related risks, and how the science behind them could impact business-as-usual. Tackling this challenge requires innovation and creativity. Perhaps resistance to this change would be easier to overcome if businesses view this as an opportunity, and not a challenge. A lot needs to be done to abate emissions; but we don’t have a lot of time.