The climate crisis is changing the way we live and the way we work. The affects are already being felt across all businesses in all industries. But climate change and the transition to a net-zero future will create new industries and new growth opportunities for business, which will bring new jobs and could revitalize economies.
But there’s a downside. Almost all industries are also threatened by the effects of climate change, either directly or indirectly. For companies thinking about the ways the changing climate might affect their business, they should consider the risks that broadly fall into three categories: physical, transitional and liability risks.
Physical risks
The physical risks of climate change are those immediate threats that come from the physical environment. These include flooding, hurricanes, drought, wildfires and other natural hazards that are exacerbated by climate change and can cause physical damage to people, property and critical infrastructure.
For instance, there are an estimated 1.8 billion people, or 23 percent of the global population, directly exposed to flood depths greater than 0.15 meters in a 1-in-100-year flood event. At the same time 700 million people are at risk of being displaced as a result of drought by 2030.
Major weather events are already having an impact on business. Weather and climate-related events cost the global economy USD 313 billion in 2022 – with only USD 132 billion of these losses covered by insurance.
The agricultural sector is particularly exposed to physical climate risks. Flooding and drought can pose a risk to crops and livestock, as do extreme cold and extreme heat. The Australian Bureau of Agricultural and Resource Economics reported that more than AUD 1 billion dollars have been lost by farmers in the 20 years to 2019 as a result of the changing climate, largely from drought.
The leisure industry is another sector at immediate physical risk from climate change. Ski resorts are seeing shorter seasons as rising temperatures reduce snowfall: almost all U.S. ski resorts could see a 50 percent shorter season by 2050, and up to 80 percent by 2090. While the U.S., Turkey and Australia are losing tourism income as wildfires make popular hiking regions unsafe.
Transitional risks
Transitional risk comes from the potentially higher business costs from new policies, laws and other regulations designed to address climate change. Transitional risks can also arise from changes in technologies and consumer trends, which may also lead to reputational risk as society changes its view on ethical business practices. And as sectors move away from activities that contribute to climate change, they risk being left with stranded assets – a piece of land, property or equipment whose value has deteriorated.
The energy industry is one sector particularly open to transitional risk. With the push for greener energy sources – and energy security – governments are increasingly shifting to a reliance on renewable energy sources and demanding net-zero carbon emissions from energy producers.
The mining sector is also exposed to transitional risk. Precious metal mining, for example, could be at financial risk from policies that introduce carbon pricing. The negative effects of mining on the climate and the environment are increasingly becoming a reputational issue for mining companies, with investors nervous of businesses that could cause reputational harm by association.
Liability risks
Liability risks arise from a failure to mitigate, adapt to, disclose or comply with changing legal and regulatory expectations. Climate litigation is increasing worldwide, reflecting advances in attribution science, evolving legal disputes and changing public sentiment. It is also being driven by a greater focus from regulators and investors wanting to ensure businesses provide necessary disclosures and comply with an ever-evolving regulatory landscape.
Companies that pollute are obviously exposed to potential litigation. But so are companies that fail to consider future climate change in their products and services. For instance, structural engineers or property developers that fail to consider increased intensity of rainfall in design of drainage systems.
How should businesses respond to climate risks?
“Any company is impacted by different proportions of these risks – physical, transitional and liability risks,” says Amar Rahman, Global Head of Climate Change Resilience Services at Zurich Insurance Group. “Some industries will be more worried by regulatory requirements, while others might be more concerned by the loss of assets through physical damage. But companies should consider all these risks, both short and long term.”
This will require a significant shift in the way companies manage their approach to climate resilience and adaptation. Climate risks should be considered core business risks and their mitigation part of business strategy. As the effects of climate change – and the risks they pose – are ever-changing, analysis for risks should be carried out regularly.
These steps could lead to businesses investing in new technologies, moving into new areas of the industry or adapting their business models. For instance, the Arosa ski resort in Switzerland is developing its summer tourist model to safeguard its business from reduced winter snowfall. Ski resorts are also embracing technology, such as cloud seeding, to nudge clouds into dropping snow, and even wind powered snow machines that work at above zero temperatures.
Businesses shouldn’t act alone
Businesses should aim to collectively develop climate risk solutions leveraging the expertise and considering the needs of other stakeholders, including academia, regulators, government bodies and communities.
Insurers can play a key role too. They naturally want to protect their customers and can share their risk management expertise and experience. A group of 22 insurers, including Zurich, came together with the UN to produce a report outlining how the industry can help analyze and mitigate climate risk. The report recommends a more integrated approach that analyzes the physical, transitional and liability risks of climate change all together, an approach that could be adopted by insurers across industries to better protect themselves and the businesses they insure.
What are the business opportunities from climate change?
Climate change brings huge challenges, but some industries, such as clean energy providers, can embrace opportunities. According to the International Energy Agency, renewable energy is set to become the largest source of global electricity generation by early 2025, surpassing coal. Its share of the power mix is forecast to 38 percent in 2027 – up from 28 percent in 2021.
Innovation in transport, too, will reap rewards. The EU and the UK are planning to ban sales of non-electric vehicles in the next decade or two, so electric vehicle manufacturers are set to profit. Tesla is perhaps the most well-known, but all major car manufacturers are scrambling to create more powerful, reliable electric cars.
From carbon capture to recycling, new technologies that can help us adapt the way we create and use products will be in high demand. Businesses that come up with new ideas to alleviate the damaging effects of existing industrial processes will thrive.
Managing climate change risks
The effects of climate change are being felt on businesses all over the world. Taking steps to mitigate the impact on the climate is vital, but it also makes good financial sense. By acting now, businesses can lower the risks that come from climate change, and even take advantage of the new opportunities of a greener future. As Rahman says: “Companies that identify and act on climate risks now will have a better chance to not only survive but to thrive in a new net-zero world.”
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