The Impact of Climate Change on Businesses

Climate change has accelerated in recent years, leading to increased natural disasters. In 2022, severe weather events drained the U.S. economy of $165 billion – making for the third costliest year on record. Such occurrences threaten businesses and can lead to supply chain disruptions, reduced productivity, asset damage, and financial losses. As the earth's temperature rises, businesses grapple with physical, transition, and liability climate risks. These challenges can drastically impact a business, rattle investor confidence, and lead to revenue shortfalls.

Physical Climate Risks: Extreme Weather Events and Natural Disasters

Physical climate risks, like natural disasters, are the direct results of climate change. The damage wrought by these events costs the United States over $100 billion a year. Flooding, hurricanes, wildfires, droughts, hailstorms, and heat waves are all physical risks. In addition to these intermittent events, chronic physical risks constitute persistent threats to the environment, such as the acidification of oceans and changes to coastal water levels and temperatures. These risks can cause material damage to assets – like crop yields – and lead to supply chain disruptions and increased insurance costs. A business looking to mitigate such risks can adopt measures like:

• Commissioning a risk assessment to identify physical climate risks
• Creating an emergency response plan
• Investing in physical infrastructure to protect assets
• Diversifying supply chains

Transition Climate Risks: Changes in Regulations and Market Shifts

Transition climate risks account for the indirect effects of climate change. These risks include things such as introducing new government regulations – e.g. carbon pricing,  emission-standard changes, etc. – or market reconfigurations that necessitate unexpected expenditures. Such phenomena can increase prices and reduce demand for products or services. Businesses can tackle transition climate risks by putting into place measures along the lines of:

• Conducting a risk assessment to identify transition climate risks
• Staying up to date with regulations and market trends
• Investing in sustainable products and services
• Building a modular supply chain

Liability Climate Risks: Legal and Financial Impacts of Climate Change

Liability climate risks denote the legal and financial risks associated with climate change, like lawsuits or insurance claims. Challenges of this sort can significantly impact a business's net worth and reputation. Examples of liability climate risks include:

• Failure to disclose climate risks to investors or stakeholders
• Failure to comply with climate-related regulations
• Failure to prepare for or respond to extreme weather events
• Inadequate insurance coverage for climate risks

Businesses can mitigate liability climate risks by implementing measures such as:

• Conducting a risk assessment to identify liability climate risks
• Building a comprehensive climate risk management strategy
• Ensuring compliance with climate-related regulations
• Investing in insurance coverage for climate risks

Mitigating Climate Risks: Best Practices for Businesses

Mitigating climate risks requires a comprehensive approach that involves understanding the potential impacts of physical, transition, and liability climate risks and pursuing measures to curb these risks. Best practices for limiting climate risks include:

• Conducting regular risk assessments to identify and prioritize climate risks
• Developing a comprehensive climate risk management strategy that includes specific goals, targets, and timelines
• Investing in renewable and energy efficiency measures to reduce greenhouse gas emissions and lower energy costs
• Developing contingency plans to prepare for and respond to extreme weather events
• Engaging with stakeholders, including employees, customers, suppliers, and investors, to build support for climate-risk management measures

Climate change is no longer a distant threat – it's a reality affecting businesses worldwide. Indeed, some estimates project that the Earth’s average temperature could rise by three degrees or more by the end of the century. Among the many consequences that could befall the global economy if this were to occur, economists have warned of a 7-11% reduction in global GDP year-over-year.  

Any company that wants to safeguard its future should start taking steps to make its operations more resilient to future climate threats. Aside from using the suggestions outlined above, businesses may also consider partnering with climate-solution specialists who have helped large and small organizations reduce their carbon footprint and make their operations more agile. Arbol brings together a complete ecosystem of tools to help businesses analyze and address their exposure to climate risk. To learn more, please reach out to one of our risk-mitigation experts at: https://www.arbol.io/contact