How does climate change affect businesses? 5 financial impacts
Learn about five important effects climate change is having -- and will continue to have -- on the business sector, and why action from leaders and employees is critical.
As with credit card debt or an escalating health issue, climate change is a problem that only gets worse if it's ignored.
Indeed, the heating planet and subsequent erratic weather events are already having a profound effect on people. That's why everyone needs to do their part to combat climate change and global warming.
It's also why it's so important for companies to embark on a sustainability journey.
Climate change refers to long-term temperature and atmospheric changes, and global warming -- a subset of climate change -- refers specifically to the rapidly heating planet, which in many parts of the world already hits dangerous levels. Since the Industrial Revolution, these changes have worsened due to human activities, especially burning fossil fuels, cutting down forests, and raising cows and other livestock for food.
Of particular concern is that emissions have led to a rise in global temperatures of approximately 1.1 degrees Celsius since 1850, according to the Intergovernmental Panel on Climate Change (IPCC), which is the United Nations body for assessing the science related to climate change. Over the next 20 years, those temperatures are expected to reach or exceed 1.5 degrees Celsius of warming. There are considerable risks and reasons for concern surrounding global warming above that temperature, including widespread adverse impacts and related losses and damages to nature and people around the world. These impacts will also be felt in businesses across the globe and reverberate across industries.
Before digging in deeper, it's worth noting that the majority of scientific organizations around the world have declared that climate change is real and caused by humans, according to NASA. In fact, 97% of active climate scientific researchers say people have caused these global weather-pattern shifts and hotter temperatures.
Here are five ways climate change could affect your organization in the near future.
1. Resource and materials scarcity
Growth in the global population is increasing the demand for natural resources, such as water, energy, minerals, metals and food. This rise in demand places immense pressure on the environment. For example, more greenhouse gases are released to mine for resources and to clear land for agricultural purposes. In turn, resources are more difficult to extract and more costly to obtain, which can impact prices and limit access.
The interdependence between climate change and resource scarcity will only amplify impacts on the global economy, especially if businesses continue to fight for supply without supporting more sustainable infrastructure or turning to renewable resources.
One example of materials scarcity is in the technology sector: Europe's economy has become dependent on what's known as critical raw materials (CRMs) -- raw materials vital to the economy with no viable substitutes, such as lithium. CRMs are used in many modern technologies, including smartphones, IT equipment and even clean technologies, like solar panels.
However, CRMs are extracted using hazardous chemicals and have severe negative environmental repercussions -- and they're in short supply globally, according to the article "Tools Towards the Sustainability and Circularity of Data Centers," published this year in The Circular Economy and Sustainability journal.
To create better climate practices, leaders are looking to circular economy processes and other ways of addressing dwindling supplies and harmful mining practices.
For example, more businesses are moving away from finite resources, CRMs and fossil fuels wherever possible, evaluating alternative options, such as opting for refurbished or recycled materials, and transitioning to renewables and clean energy as soon as possible to avoid exacerbating resource and materials scarcity further.
2. Supply chain disruptions
Some of the environmental risks the IPCC have identified include more intense and more frequent extreme weather events, like hurricanes and wildfires; higher probability of extreme droughts; and expansion of areas affected by flood hazard.
These weather events can affect your business's facilities and the suppliers it relies on, causing everything from logistical shipping problems to sudden inventory loss and beyond. Extreme weather can also affect your employees' ability to go to work -- they may not be able to physically travel to work or may need to take off time to repair or find new housing due to fires, floods, heatwaves and other climate issues.
How do those increased climate change issues translate into dollars?
The U.S. had 20 distinct climate and weather disasters that cost $145 billion in 2021, according to the "2022 Gartner Emerging Priorities in Supply Chain Survey." Specific to supply chains, the increase in disruptions are already causing supply chain leaders a 4% increase in cost to get back on track -- a percentage that may become permanent due to the sheer volume of disruptions.
The report authors write: "Supply chains are subject to the most disruption due to climate change, so supply chain leaders must inspire the whole organization to take action."
3. Business continuity risks
Increasing climate-related disruptions are creating new challenges for business resilience across organizational functions, not just for the supply chain. Leaders and IT teams will need to create new ways to maintain critical business functions during a disaster and recover with as little downtime as possible.
For example, business continuity plans typically identify and prioritize risk based on categories, such as strategic risks, financial risks and people risks. Today's plans should include climate risks.
Major business risks can be either directly caused or negatively affected by climate change, and even indirectly or secondarily, climate change can have a big impact on continuity due to increasingly interconnected business processes and systems, according to the paper "Saving the world might save your company," published by Deloitte.
Integrating climate risk into your business continuity plan and risk management process will be key to navigating or even preventing harmful business impacts.
4. Rising insurance costs
In the face of mounting losses due to more frequent and severe extreme weather events, insurers are adapting their pricing and investment decisions.
More than half of U.S. insurance regulators surveyed indicated that climate change was likely to have a high impact or an extremely high impact on coverage availability and underwriting assumptions, according to "Insurance Regulator State of Climate Risks Survey," published in 2019 by the Deloitte Center for Financial Services.
Regulators are also starting to shift their attention to insurer actions, and while it's clear insurers will need to adapt to the impacts of climate change, it's unclear just how drastically doing so will impact businesses.
Economic losses from natural disasters were around $313 billion in 2022, with approximately 42% covered by insurance, according to Aon plc, a professional services firm that sells risk mitigation products. With the risk that both natural disasters and chronic climate conditions, such as flooding due to rising water levels, will worsen in the years to come, businesses will need to consider how rising insurance costs and more expensive coverage may affect their bottom line.
5. Decreased consumer spending
Businesses aren't the only ones grappling with climate change -- consumers are dealing with similar issues. Many communities are being disrupted by extreme weather events, people are being displaced due to expanded flooding and relentless droughts, and purse strings are tightening as customers stretch to afford necessities in high demand due to resource constraints.
More consumers are experiencing climate change-driven financial strains, including higher healthcare costs, gas and heating bills and property damage, according to "The Impact of Climate Change on American Household Finances" report, published by the U.S. Department of the Treasury this year.
These financial strains may lead to decreased consumer spending and shifts in consumer demand for certain products and services -- something all businesses should take into consideration and plan around to avoid revenue losses.
How can businesses adapt to climate change?
Climate change isn't just about rising temperatures. If allowed to continue unchecked, there will be large-scale, widespread impacts on the planet and everything living on it.
But people across industries and sectors can band together and change that.
Aggressive climate actions to lower greenhouse gas emissions have the power to limit climate change, according to the IPCC and others. This will require a concerted effort by organizations across the globe to curb emissions and commit to more sustainable operations within the next 20 years.
Here are a few ways to start:
- Partner with sustainable providers across the supply chain.
- Adopt green programs that will make the office more sustainable.
- Source materials responsibly and move away from raw material dependence.
- Transition to renewable energy sources organization-wide.
- Explore and identify ways to reduce carbon footprint as much as possible.
- Have IT teams support sustainability efforts and move to green computing practices.
If the world can come together and prevent a 1.5 degree temperature rise by 2050, then many of the impacts outlined here and by the IPCC can be avoided. But this isn't something that can be ignored -- every person and organization must commit to doing their part.
Jacob Roundy is a freelance writer and editor, specializing in a variety of technology topics, including data centers and sustainability.
