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Companies are seriously underestimating how climate change will affect business

Just 3 percent of businesses planned to address climate change threats with sustainable solutions.
Just 3 percent of businesses planned to address climate change threats with sustainable solutions.
Image: REUTERS/Chris Keane
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As climate change progresses, it will continue to trigger more intense storms, drought, wildfires, sea-level rise, species extinction, and crop failure. While these devastating environmental changes come to mind first when discussing climate change, there’ll also be potentially disastrous downstream effects on businesses—and they don’t seem to be taking the threat seriously.

In a new study published Dec. 10 in the journal Nature Climate Change, scientists working with environmental non-profits Conservation International and the Carbon Disclosure Project report that the business world might be massively underestimating the effect of climate change on their work.

In an analysis of 1,630 companies’ corporate disclosures about the effects of climate change, the researchers found that the aggregate risk reported by companies only adds up to tens of billions of dollars, whereas most experts estimate the actual cost will climb into the trillions (pdf). The authors note that this huge discrepancy “reflects both that a large number of companies do not report financial impacts and that many that do are probably underestimating them.”

Between 2011 and 2016, more businesses began to recognize that climate change will affect their business: 67% of companies’ 2016 public disclosures described climate change risks as “more likely than not” or “virtually certain,” compared to 50% in 2013 and 34% in 2011. In public disclosures to investors, companies list potential losses from climate change. For instance, Samsung notes that cyclones could cause manufacturing facilities to shut down, while Portuguese bank Caixa Geral de Depósitos notes that hotter temperatures will lead to higher electricity prices.

But most companies have a conservative view of the risks caused by climate change—companies’ predictions only scratched the surface of what experts predict might happen in global markets. For instance, while many companies included in their public disclosures that climate change might affect their supply chains, they rarely accounted for predictions that climate change will decrease average incomes and consumption, which would likely lead to decreased demand for products.

Disclosures also rarely incorporate what the paper’s authors call “emergent” climate risks, like permafrost thawing, which would release CO2 and methane stored in the ground, as well as ancient microbes. Companies may genuinely not understand these effects, or they might be wary to include what they see as less acute risks in disclosure reports out of fear that they’ll scare off investors.

If you can’t adequately predict climate change’s effects, that likely means you can’t adequately prepare for them, either. While most companies laid out plans to create physical infrastructure, like new buildings in more climate-resilient locations, or adaptation strategies, like improved logistics or early warning systems, just 3% of strategies considered ecosystem sustainability, conservation, or restoration. For example, building a new headquarters somewhere else might help an individual business continue its operations, but that may leave workers at the original headquarters high and dry, and add to the fossil fuel use and emissions underlying climate change in the first place.

The authors say companies should take a wider view and focus more on long-term ecosystem sustainability, rather than band-aids that may temporarily boost companies’ bottom lines, but at the cost of the local environment and community.

“Aside from reducing global greenhouse gas emissions, the best way to reduce the costs of climate change is to proactively manage for its consequences,” the authors write. “Given that the impacts of climate change are projected to worsen in the coming decades under almost every emissions scenario and that impacts could become extremely severe … companies will need to move from incremental adaptation approaches to transformational ones.”