In 2015, we provided a forward-looking perspective on the likely impacts of climate change on business, and climate change has continued since to raise global temperatures, alter weather patterns, and increase sea levels. The jury is in: Climate change has already had a material impact on business across industries and sectors, and companies are increasingly concerned about climate-related physical and transition risks.
In this article, we evaluate four areas where climate change has concretely impacted business in the last five years.
Climate change and its affect on business
1. Extreme weather events disrupt freight transportation across supply chains.
In 2022, China experienced record-setting droughts, heatwaves, and floods, depleting the dams that generate nearly three-quarters of the nation’s electricity and allow cargo ships to transport freight up and downriver. Low water levels and dry rivers necessitated rolling blackouts across multiple cities. Meanwhile, flooding in central China disrupted other supply chains and forced manufacturing plant shutdowns, including for Nissan.
In Panama, climate change exacerbates regular cycles between heavy rain and drought, causing more extreme swings in the water levels of the artificial lakes which enable the free flow of international trade and goods across through the Panama Canal. The country is conducting feasibility studies to identify mechanisms to store rainwater to replenish its locks during periods of drought, but the number of ships permitted to pass through the canal has been reduced through 2024 due to increasing climatic variability. Many shipping companies will need to redirect ships to alternative channels, likely disrupting supply chains for commodity groups including motor vehicles, petroleum products, grains, coal, and coke.
2. Physical and transition-related risks loom over company facilities and operations.
Energy systems are highly sensitive to changes in temperature and precipitation, and energy intensive companies are particularly vulnerable to electric supply gaps. In the United States, extreme weather and natural disasters pose significant energy supply risks in all regions of the country. In 2021, the “Great Texas Freeze” cost Texas – residents and businesses alike – more than $10 billion in economic losses, and some businesses are still struggling to recover to this day.
Climate change’s impact on weather events such as floods, droughts, and temperature fluctuations also poses direct physical risks to many organizations. These events damage company property, hinder resource productivity, and are intensified and made more frequent by climate change. The 2019 Mississippi River flood wiped out crops, killed livestock, and damaged significant infrastructure and capital goods. Over 231,000 acres of farmlands were rendered unusable for the year. Meanwhile, heatwaves and droughts are depleting global water supplies, resulting in billions of dollars in water-related losses and stranded assets.
One under-discussed impact of climate change on the bottom line relates to greater spending on emergency preparedness-related business expenses. Businesses identify and mitigate climate-related hazards by conducting risk assessments, developing continuity plans, and implementing crisis management protocols. These activities aim to protect long-term operational resilience, and require serious resource investments. We continue to see rising insurance rates due to hurricanes, winter freezes, floods, and wildfires. Some reinsurance agencies have exited high-risk states such as Florida, while many that remain are raising insurance rates by 50% to 100%.
3. New policies create serious constraints on long-term growth.
Many local governments across the United States are responding to climate change with legislation aiming to reduce the amount of resources (e.g., water and fuel) businesses consume and the quantity of harmful outputs (e.g., waste and emissions) they generate. In May 2023, Arizona officials announced the state will no longer grant certifications for new developments within the Phoenix area, as groundwater continues to disappear due to climate change-driven drought and overuse. Developers seeking to build new construction will have to demonstrate they can provide an “assured water supply” from alternative sources, forcing businesses to invest in new or existing surface water storage and delivery systems.
The Netherlands is the European Union’s largest meat exporter, and has been the center of scrutiny due to the nation’s inability to limit nitrogen runoff. Active nitrogen exposed to soil generates nitrous oxide, which is a potent greenhouse gas. In June of 2022, the Dutch government introduced a plan to reduce the number of livestock raised in the country by more than 35 million by 2030 – a 30% decrease. The economic impact cannot yet be assessed, but this plan poses serious threats to farmers’ livelihoods. The Dutch government will attempt to mitigate the impact on farmers by paying some to relocate, exit the industry, or transition to less intensive methods of farming.
4. Shifts in social norms and consumer preferences directly impact bottom-lines for unprotected brands.
Generation Z and Millenials are pulling out all the stops to shop their values, influence corporate behavior, and ensure a sustainable planet for future generations. Consumers are increasingly willing to cut consumption and expect meaningful climate action from businesses of all sizes. In one consumer study conducted by Dentsu and Microsoft, 88% of global respondents make sustainable purchases when able, while 77% indicated that in five years time, they only want to spend their money on brands that practice green and sustainable advertising.
We see similar shifts in the labor market, where employees demonstrate a preference to work for businesses that reflect their values and support their physical and mental health. As global temperatures continue to rise, climate change policies and commitments have become strong drivers for talent attraction and retention, though employees see ambitions as empty words unless backed up by concrete actions and tangible impacts. According to the 2022 Deloitte CxO Sustainability Report, companies are feeling a moderate-to-large degree of pressure to act on climate change from various stakeholder groups – from regulators, to customers, to employees – and many C-suite executives agree that sustainability efforts can improve employee morale and well-being.
How can Third Partners help?
Organizations across sectors and geographies need to assess their vulnerability to the physical and transition-related risks posed by climate change. Our team at Third Partners has decades of experience helping brands, manufacturers, and professional services firms to define their environmental and social impact ambitions, identify material risks and opportunities, and take action. Some of our services that can help you discover and improve your impact are Supply Chain Impact services, Carbon Footprint Measurement, and our Materiality Assessment services.
Contact us today for a free consultation.
