Climate hazards are emerging as a critical threat to the business world, with potentially devastating impacts on profitability and stability, according to a report by the World Economic Forum in partnership with Accenture.
The report warns that publicly traded companies could face annual fixed asset losses of up to $610 billion by 2035 due to climate-related risks, translating to a potential 7.3% drop in average company earnings. As these risks intensify, the report offers guidance for businesses to build resilience and adapt to the changing climate landscape.
Quantifying the Financial Risks of Climate Hazards
As the climate crisis intensifies, businesses are facing unprecedented financial risks from various climate hazards, including extreme heat, wildfires, drought, water stress, tropical cyclones, and coastal and fluvial flooding, according to the report.
The financial toll of these climate hazards on companies’ fixed assets is projected to range from $560 billion to $610 billion by 2035, depending on the emissions scenario. This figure could climb even higher, potentially hitting as much as $1.1 trillion by 2055. These losses primarily stem from damage to property, plant, and equipment – assets crucial for generating returns and driving societal value.
“Companies that fail to build resilience stand to lose their ability to compete, as the consequences of the crisis shift markets and fracture supply chains, degrading and stranding physical infrastructure and compromising lives and livelihoods,” the report’s authors state.
The impact on corporate earnings is equally concerning. Without effective resilience strategies, companies could see their average annual earnings drop by 6.6% to 7.3% by 2035. This decline is particularly alarming when compared to historical economic shocks. During the depths of the COVID-19 pandemic, for instance, S&P 500 profit margins declined by 15.3% but quickly rebounded due to significant government interventions, according to the report.
However, the climate crisis presents a more persistent threat. Unlike the pandemic’s short-term shock, these climate-related losses are expected to recur annually, posing an increasingly challenging problem for businesses to mitigate through traditional means such as insurance and offsets.
The burden of these financial risks is not evenly distributed across industries, the report noted. The most exposed sectors, including telecommunications and utilities, could face losses equivalent to a drop in yearly earnings of more than 20% by 2035.
It’s important to note that these projections may actually underestimate the total costs facing businesses. The analysis focuses solely on fixed assets and doesn’t account for the full scale and scope of cascading threats that climate hazards can trigger. As such, the true financial risks could be significantly higher than current estimates suggest.
Broader Risks to Earth Systems and Socioeconomic Sectors
Recent studies suggest that five critical Earth systems may have already reached a point of no return. This development has significant implications for the frequency and severity of climate hazards worldwide, according to the report. Even if global CO2 emissions were to be drastically reduced in line with the Paris Agreement, natural sources of emissions locked in soil, frozen ground, oceans, and forests would continue to be released. This self-perpetuating cycle adds momentum to the climate crisis, potentially pushing these systems beyond their capacity to recover.
The consequences of these tipping points are far-reaching. Businesses and societies can expect more frequent and severe climate events, including extreme heat waves, wildfires, droughts, and flooding. These hazards pose direct threats to corporate assets and operations, as well as to the broader socioeconomic systems upon which businesses depend.
Cascading Risks Across Sectors
The ripple effects of climate change extend to key socioeconomic systems, creating a complex web of risks that businesses must navigate:
- Food: Agricultural systems face increasing pressure from changing weather patterns, water scarcity, and soil degradation. This threatens global food security and supply chain stability for food-related industries.
- Built Environment: Infrastructure and urban areas are vulnerable to rising sea levels, extreme weather events, and changing temperature patterns. This poses risks to real estate values, construction practices, and urban planning.
- Health: Climate change exacerbates health risks through increased air pollution, the spread of infectious diseases, and heat-related illnesses. This impacts healthcare systems and workforce productivity across all sectors.
- Technology: While technology offers solutions to climate challenges, it also faces risks. Extreme weather events can disrupt critical infrastructure, including data centers and telecommunications networks, potentially causing widespread economic disruption.
- Financial Services: The financial sector must grapple with climate-related risks to investments, insurance liabilities, and overall market stability. Climate change could lead to significant shifts in asset valuations and increased volatility in financial markets.
Building Business Resilience and Adaptation
To drive better C-suite decision-making, executives should implement four critical actions within the next 24 months, the World Economic Forum report recommends:
- Conduct a detailed climate resilience audit of core capabilities and processes, ensuring adaptation permeates every level of the organization and its ecosystem partners.
- Improve climate risk data and strategic intelligence. Invest in skills, technology, and responsible AI use to accelerate insights and decision-making on new risks and opportunities.
- Integrate climate risk into every capital maintenance and investment decision. Build resilience criteria with cost-benefit analyses to reduce stranded asset risk while prioritizing socio-economic opportunities across the value chain.
- Partner with the scientific community to enhance climate modeling. Sponsor and integrate evolving scientific insights with commercial models to improve analysis quality and interpretation, shaping strategic decisions to account for cascading exogenous shocks.
Obtain the full report here.