Updated: Dec 10, 2020
As part of an in-depth analysis of the effects of climate change on business, The Economist is publishing an eight-part series of articles on the subject and the impact it is likely to have on businesses throughout the world.
The start and end point inevitably turns on carbon emissions and its impact on global warming. "But to have a decent chance of keeping Earth’s mean temperature less than 2°C above pre-industrial levels, net emissions of CO2 and other greenhouse gases must fall to more or less zero by mid-century." argues Guy Scriven. "And such a drop needs to be achieved not by halting the world economy in its tracks, but by rewiring it"
"Decarbonising the economy is an enormous task and will be hugely disruptive but failing to do it will result in a harsher climate and even greater risks for companies. One lesson from the pandemic is that scientists’ warnings about seemingly distant disasters should be heeded."
The challenges to business are four-fold. "First, companies should worry about the immediate impact of climate change on their operations. Next, they must expect ever more intense regulation, driven both by governments and by the demands of customers and consumers. Third comes the growing risk of litigation over climate change. And fourth is technological change that will create opportunities as well as costs—opportunities that their competitors may be the first to exploit."
We explore each of those challenges in the forth-coming series. Meanwhile here is the full introductory article in pdf form >
The second instalment in our reported series from The Economist looks at the effect of weather extremes on business and the steps needed to address it.
The evidence of extreme weather as a result of global warming, according to the report appears to be incontrovertible.
"Climate change is clearly making the weather more extreme. Scientists say super-powerful storms have become more common, and there are more days of heavy rainfall or extreme heat. No matter what mankind does, this trend will continue for decades. Global temperatures respond only slowly to changes in the concentration of greenhouse gases in the atmosphere. Deteriorating conditions are locked in for some time.
"Two particular pieces of analysis illuminate the threat both by sector and by natural event. Both demonstrate how climate risk is unevenly spread. The first comes from Schroders, an asset manager. Its analysts looked at the physical risks posed to 11,000 publicly listed companies and concluded that climate change could reduce the firms’ value by 2-3% on average. But the numbers vary greatly by industry. Energy and utility sectors stand to lose 4% and 8%, respectively. Property firms could lose up to 9%. For services firms with few physical assets, such as tech and finance, the impact is smaller: less than 0.5% of their value."
"In a separate piece of number-crunching, Four Twenty Seven, a climate consultancy, looked at the events that most threaten facilities owned by publicly listed firms. Water stress was the most prominent, affecting 30% of assets. Another 10% were at risk from heat stress and roughly 20% were vulnerable to floods, hurricanes and typhoons. Sea-level rise was the least concerning for businesses, affecting only 3% of assets in the data set."
Risk assessments and threats to supply chains are additional factors for businesses to consider as they plan for the decades ahead.
"Climate-risk consultancies are combining asset-level data with climate and econometric models to generate estimates of values at risk. “We now know many firms’ climate risk better than they do,” claims Rohan Hamden, the boss of the Cross Dependency Initiative, a Sydney-based climate-risk firm. Investors are doing similar analysis or hiring consultants. Many say they use analytics to exclude vulnerable firms from specialised climate funds."
On supply chains, "The more complex a good, the greater the risk of disruption. Industries that rely on many suppliers and layers of manufacturing between the raw materials and the finished product tend to have more supply-chain risk than operational risk, explains Milan Simic of air Worldwide, a climate-modelling firm."
"Another problem is critical infrastructure, such as electricity or telecoms. When power is cut, other services go down as well. Most telecoms towers have backup batteries that last for only four hours. Smartphones run out of power after about ten. After Superstorm Sandy, two-thirds of New York’s petrol stations were unable to dispense fuel because of power cuts."
Here is the full article in pdf >
The third instalment in our reported series from The Economist looks at the rising tide of regulations imposed by governments across the world.
"That may be good news for the planet, if perhaps not for many firms. By one estimate transition-related regulation, particularly carbon pricing, and technological disruption could reduce the market capitalisation of 1,400 of the world’s biggest companies by 3%, or $1.6trn.
"More rules are likely. Urged on by voters, policymakers are setting ever tougher green targets. Over 70 countries have committed to reaching net-zero by at least 2050. The EU proposed a net-zero target in law in March. All but one of the G7 countries have made similar commitments.
"Joe Biden is promising to make climate change a centrepiece of his presidency. He plans to spend $2trn in four years on low-carbon infrastructure and energy. He wants to join others by going for net-zero by 2050 and emissions-free electric power by 2035. Mr Biden was part of the team that helped negotiate the Paris agreement, which he plans to rejoin."
But the market cost to business could be huge: "An analysis by Vivid Economics, a consultancy, and the Principles for Responsible Investment, a UN-backed group of investors, offers some answers. The researchers looked at the exposure of 1,400-odd publicly listed companies to “transition risks”—technological and regulatory threats from decarbonisation. Some $1.6trn, or 3.1%, of market capitalisation, would be wiped off the value of the MSCI All Country World Index, a gauge of global stock markets.
"Whenever it occurs, the shock will be concentrated. In the least-damaging scenario, four-fifths of companies would see their value move up or down by less than 10%. But the impact on the remaining fifth is bigger. The worst-performing 100 firms would lose 43% of their value; the best performers would gain 33%. Energy is the hardest-hit sector, followed by other high-emitting industries such as utilities and mining. Within sectors there are winners and losers too. Companies that embrace low-carbon strategies will do best; heavy polluters will suffer most."
Here is the article in full, including the steps that are or could be taken to minimise disruption:
Part four in the series Cheap cheats looks at the difficulty in measuring the effectiveness of carbon offsetting.
"Climate litigation is a growing risk for businesses and bosses alike. Data from the Sabin Centre for Climate Change Law at Columbia University show that in the 1990s a mere handful of cases were brought against companies. The following decade saw about 20. But since 2010 there have been over 110."
This fifth report outlines the growing list of paths to litigation against companies and governments which come in three forms:
"The most ambitious are those brought by American states and cities against such oil majors as ExxonMobil and Chevron." If the precedent of lawsuits against Big Tobacco is anything to go by, the costs to Big Oil could be just as high.
"Another type of litigation is cases that look at climate change through the prism of human rights. In December 2019 the Philippines commission on human rights ruled that oil majors could be sued on human-rights grounds. That links two strands of law which were previously largely separate. Thus it will make further litigation more likely, argues Joana Setzer of the Grantham Research Institute in London.
"Then there are cases brought against individual executives. Such actions are common outside the climate-change arena: insolvencies are sometimes followed by shareholder claims against board members. Nigel Brook of Clyde & Co, a law firm, expects this form of climate litigation to grow. Bosses’ duty-of-care obligations will increase as more information about the impact of climate change comes to light. And activist green investors will see this as yet another weapon to use in the fight."
"It is not always bosses in the dock. Across the world, activists are also using the courts against their governments. In December the Dutch supreme court ordered the government to cut the country’s greenhouse-gas emissions by a quarter from 1990 levels by the end of 2020, the first time a court has forced a government to take direct climate action. Two months later a court in London said that the British government’s decision to expand Heathrow airport was unlawful because it had not taken national climate commitments into account. Both cases could have broader implications for businesses, especially utilities and airlines."
The report however does offer some hope for escape from the legal quagmire: "The great hope for businesses harassed by consumers, regulators and lawyers may be technological change. Even lobby groups such as America’s Chamber of Commerce support this. “Innovation is one area everyone can get behind,” says Marty Durbin, head of the chamber’s energy arm. He points to American shale gas, which took off in the 2000s after a technological breakthrough. The price of gas plummeted and its share of American power generation rose from 20% in 2006 to 38% in 2019, overtaking coal. A booming new industry was created that helped America cut emissions."