Climate Change Risk
There’s taking a risk on a new idea, and then there’s the risk of ignoring the obvious.By Ryan Velez
A shop in the Northeast has their building flooded, without the money to rebuild. In the West, rising energy prices cut a business’s profit margins thinner and thinner. In the South, a construction project is halted during a heat wave as workers collapse. In the Midwest, a farmer’s crop decreases by half, putting his livelihood at risk. These stories may seem far apart, but they all stem from a root cause: climate change. While many pigeonhole climate change as an environmental concern, the truth is that this is an all-encompassing problem, especially for businesses. From rising prices for goods and services to civil unrest, climate change has already begun to affect businesses of every size in every field in every region.
The Risky Business Project, a joint partnership of Bloomberg Philanthropies, the Paulson Institute, and TomKat Charitable Trust (a joint trust by Tom Steyer and Kathryn Taylor), has released their report Risky Business: The Economic Risk of Climate Change in the United States, to educate business owners on how climate change stands to affect them. This report breaks down specific areas of financial risk stemming from climate change, both over-arching risk and specific risks by region. One thing that is important to realize is that while this report projects to 2100, many of the harmful effects of climate change are already taking place.
As Tom Carnac, president of the North America Carbon Disclosure Project says, “Dealing with climate change is now a cost of doing business.”
When we think of the effects of climate change, we think of a world that slowly gets hotter and hotter. However, what may seem like just an inconvenience now has severe consequences for businesses.
As the chart from the Risky Business report indicates, rising temperature is an overall effect, not a day by day or even year by year event. By mid-century, the average American is likely to witness 27-50 days over 95˚, two to three times what has been seen over the last 30 years. In regions already predisposed to high heat, this statistic could increase to several months of 95˚, to say nothing of large urban centers which are naturally hotter than surrounding areas.
In the short term, demand for air conditioning will explode in response, straining generation and transmission capacities. In order to alleviate some of this increased demand, over 95 gigawatts of new power generation capacity will need to be created over the next 5 to 25 years. This is the equivalent of 200 natural gas or coal-powered plants, and is poised to cost $12 billion per year.
The financial burdens of rising heat levels accompany issues for workers as well. Due to hotter conditions, there is legitimate concern about a drop in labor productivity in outdoor workers, such as those in construction and utility maintenance. In the long term, where 45 to 96 days over 95°F is expected to be the national average, health concerns also enter the fray, as there is a certain threshold where the body cannot maintain a proper core temperature without air conditioning. On days where the heat passes this threshold, all outdoor work would be stopped — wasting valuable man-hours — or put workers at possibly fatal risk.
Rising Sea Levels
While increased heat is one side effect of the rising sea levels, there are also several more direct problems that business owners have to face as a result. If climate change continues at its current rate, between $66 billion and $106 billion worth of existing coastal property will likely be below sea level nationwide by 2050. The fact is that land is a very important commodity for businesses, so any loss of viable land not only disrupts business operations and costs billions of dollars, but stands to kill thousands of businesses outright. After all, not everyone can afford to relocate.
Something else that also needs to be considered is the harm to infrastructure. What does a grocer do if their favored purveyor is no longer in business? What about businesses reliant on overseas shipping? It is very easy to forget that climate change stands to harm businesses at the intimate and industry levels, even indirectly.
The image of rising coastal waters can be a slow, gentle rise that we can manage as it happens. Unfortunately, the storms we have seen — Katrina, Sandy — are the real way that rising oceans will encroach on our coasts. In 2012, Hurricane Sandy cost $65 billion dollars in damages, the world’s most costly natural disaster in history, on top of the tragic loss of life and property. High sea levels exacerbate future hurricane risks by allowing storm-related flooding to spread further inland and do more damage. In the Northeast, where Hurricane Sandy hit hardest, the average property loss for hurricanes and other storms is estimated to reach $6 billion to $9 billion annually. In addition, 88% of the region’s population lives in coastal counties, at high risk from rising sea levels. Other low, coastal population hubs like New Orleans or Miami also have both businesses and populations at risk.
When it comes to agriculture, farmers are in a bit of a unique position, as adapting to climate conditions is something that many farmers are already used to doing to ensure a maximum crop. With that said, though, the aftereffects of climate change are larger shifts than we have ever been seen before, and even the most flexible farmer is poised to take a hit that they may not be able to recover from. For example, as temperatures rise in the Midwest, where 520,000 farms total $135.6 billion in value, some farmers can try and use techniques such as seed switching and double- and triple- cropping to try and mitigate the loss. The issue with this is regional variance and education. For example, farmers based further south like in Kansas or Missouri currently stand to lose more, with a 73% crop yield loss at the end of the century versus a 63% regional average. In addition, not every farmer may have access to the education or tools to know how to use adaptive techniques to combat climate change. These are the most at-risk group: in areas where climate change promises to cut into their profits without any way to mitigate it.
When talking about American farmers and climate change in the long-term, there is a more looming issue: relocation. According to the report, as a consequence to some of the unfavorable conditions in current farming regions, crop production will likely relocate to areas like the Northwest and Canada. As a result, the farming industry itself is likely to survive, and shortages won’t likely be a huge risk in America — though they’ll be a huge problem in developing countries. Individual farmers and farming communities will be decimated in the abandoned regions, because as we must state once again: relocation is not an option for everyone, especially as profits from farming are poised to decrease over time.
One effect from climate change that we often overlook is the social effect. While this may not be as dramatic as financial and natural upheaval, this still plays an important role. As businesses are beginning to see how climate change factors into their bottom line, the eyes of the public are on them as well. This more globally conscious consumer base poses its own unique challenges for businesses, especially larger ones with a visible impact on climate change. If a business decides not to enter the debate or is caught engaging in activities that stand to negatively impact climate change, there is a very real risk of backlash, from simple negative publicity to more financially harmful activities like protests and boycotts. There is also the threat of fines, from the Clean Air and Water acts or local regulations. For businesses still on the fence about climate change, it may be their consumers that end up forcing action.
In the face of all these upcoming issues, the Risky Business report also takes the leap from risk assessment to risk management, offering advice on what steps businesses can take to try and stop climate change from extending further. Of chief importance is that businesses become educated on what climate change does and how it affects their businesses, and shift their financial plans and business models to accommodate it. However, other groups need to come together with these businesses in order to fight climate change. Investors need to make sure their evaluate their investments with climate change in mind, as failing to do so could result in dire consequences as businesses fail. The public sector also needs to contribute by to instituting policies allowing for further mitigation and adaptation to take place. The latest Intergovernmental Panel on Climate Change Report says that the world may have as little as 15 years to “keep planetary warming down at a tolerable level.” This makes it all the more important for businesses to learn about how climate change stands to harm them: as many of them have everything to lose and little time to save it.