Despite recent reports that highlight the potentially devastating economic impact of climate change, the business world may not be taking the threat seriously enough, according to a new study.
The researchers looked at more than 1,600 corporate adaptation strategies, concluding that most companies are making only narrow and incremental changes to managing the risks and finding “significant blind spots in companies’ assessments of climate change impacts and in their development of strategies for managing them.” The study was published last week in the journal Nature Climate Change.
“It’s something that not enough companies are paying close enough attention to, and even those that are have room for improvement,” said John Weiss, company network director at Ceres, a nonprofit dedicated to sustainable business practices and investing.
Climate risk reporting is not common practice in financial filings, and it was only three years ago that the Financial Stability Board created a Task Force on Climate-Related Financial Disclosures (TCFD). But investors are increasingly urging companies to disclose physical and material risks as climate change impacts escalate. The same day the climate risk study was published, a coalition of more than 400 investors overseeing $32 trillion in global assets issued an urgent call to world leaders for greater ambition in addressing climate change, including improving climate-related financial reporting.
“The reality is that the long-term nature of the challenge has, in our view, met a zombie-like response by many,” said Chris Newton, executive director of responsible investment at IFM Investors, which has $80 billion in assets under management. “This is a recipe for disaster as the impacts of climate change can be sudden, severe and catastrophic.”
Businesses are already feeling those impacts. Both short-term extreme weather events like hurricanes and longer-term impacts such as prolonged heat, droughts causing water shortages, and other climate-driven operational challenges are realities that companies must manage. According to a recent CDP analysis, U.S. companies are reporting operational risks: 88 percent of U.S. real estate companies cited operational risks related to hurricanes, flooding, storm surges and sea level rise, while the insurance industry took a huge hit from the 2017 hurricane season and companies in the Colorado River Basin reported more than 70 serious water risks to their operations in 2017. By the end of this century, potential damage costs in some industries could tally in the hundreds of billions of dollars annually.
The United Nations’ Intergovernmental Panel on Climate Change rang the alarm about these potentially catastrophic damages in its recent report on the urgency of holding global warming to 1.5 degrees C above pre-industrial levels. In the U.S., the Fourth National Climate Assessment was even more blunt about the potential costs, projected in the billions not just in economic activity, but public health and infrastructure.
While businesses have begun to understand climate-related challenges, they tend to underestimate the severity of the long-term risk and lag in creating appropriate resiliency strategies. The new study analyzed voluntary climate-risk disclosures—responses to the Climate Disclosure Project questionnaire—from 1,630 large companies in 2016. The researchers said they found five key blind spots in companies’ climate risk management.
Two of them relate to costs. Not only is there a lack of accurate estimates of adaptation costs, but companies also appear to be underestimating how expensive the impacts of climate change will be. Current corporate reporting puts the cost in the tens of billions of dollars, while most global estimates put the price tag much higher, in the order of trillions of dollars. In the U.S. alone, potential damage costs could add up to hundreds of billions of dollars annually by 2100, according to the Fourth National Climate Assessment.
Another blind spot is failing to identify risk beyond direct impacts on operations. Companies did not seem to disclose how climate change would impact supply chains, employees and customers, or when they did, it was minimal compared to direct impacts.
Companies also tend to largely overlook the potential for working with nature rather than against it. Actions like restoring wetlands and reforestation have shown to be an effective response to mitigating risk, yet very few companies (only 3 percent) reported using this strategy.
Businesses also appear to be turning a blind eye to the possibility of rapid and accelerated climate change, triggered by the climate system crossing certain thresholds or “tipping points.” As the study explains, “While some policymakers and businesses are reluctant to plan for tipping points they deem to be far-fetched, past predictions of climate impacts have actually been found to be conservative, and some argue that the dismissal of extreme risks is simply a ‘failure of imagination.’”
“It’s important for companies to consider alternative futures including ones that are not good for their business, and use that analysis to drive their strategy,” Weiss said.
Overall, the study finds that current corporate adaptation planning assumes relatively small climatic changes and concludes that the reality of climate change will force businesses to abandon their business-as-usual approach.
“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 if planetary boundaries are crossed, companies will need to move from incremental adaptation approaches to transformational ones,” the report said.
Weiss said the conclusion is accurate considering the severity of the climate crisis.
“It’s not enough and not fast enough. There certainly has been progress, but the urgency of the challenge suggests it’s not enough to say there’s progress. There needs to be accelerated action,” he said.
“Climate change presents a fundamental threat to economic prosperity and the welfare of billions of people worldwide. If companies are only looking at this in the short-term and focusing on quarterly earnings, they’re not setting themselves up to be successful and viable businesses in the long run.”