The $3.6 trillion cost of climate inaction: why CEOs must act now

Intensifying climate risks will cause significant economic costs in the next two decades, with a lack of action reducing global GDP by up to 22 per cent by 2100.

The latest CEO Guide to Navigating Climate Risk from the World Economic Forum is a stark warning to CEOs who fail to prepare for climate related impacts and invest in adaptation and mitigation.

For unprepared businesses, the report states individual physical risks could put 5 to 25 per cent of their 2050 EBITDA at risk, with infrastructure-heavy businesses being the most vulnerable. This is related to the damage caused by extreme weather events such as violent storms, flash flooding, drought, and extreme heat.

Physical climate risks refer to climate risks with the potential of financial loss as a result of physical damage caused by climate change. For example, a heavy storm damaging a warehouse roof, generating repair costs.

The cost of climate change

To date, climate change has caused over $3.6 trillion in damage since the year 2000, and without urgent and significant action, global GDP could drop by up to 22 per cent by 2100.

Climate change directly impacts the ways countries and businesses operate day-to-day. For example, a drought in 2022 reduced the capacity of Sichuan’s hydropower generation by 20 per cent, forcing Toyota and Foxconn, who were reliant on this supply, to halt production at their plants.

Heavy flooding in Germany in 2021 generated $1.4 billion in damage to railway tracks, bridges, and stations, interrupting the freight of products and materials in increasing infrastructure costs.

Vicious Californian wildfires over a period of two years caused PG&E to file for bankruptcy in 2019 after they faced around $30 billion in liabilities as a result of these fires. These are just a few examples of the ways organisations are impacted by climate change, and as global warming increases, so too does the frequency and intensity of these events.

Recognition without the action

The report indicates general recognition of climate change issues among business leaders, but a succinct lack of action. According to a 2023 survey from CDP, 72 per cent of the largest thousand respondents across eight industries identified physical climate risks that could directly impact their business. In spite of this, companies are failing to translate this recognition and fear into policy and action.

One of the reasons for inaction could be fragmented climate risk data which makes it difficult for organisations to accurately assess the full impact of climate change across their value chain. This uncertainty is exacerbated by poorly managed value chains and a lack of communication with key partner businesses. In other words, companies only identify their most immediate risks and treat them in isolation.

Although organisations are recognising there is some physical threat from climate change, many organisations underestimate the financial impact compared with sectoral estimates based on comprehensive analysis.

The business case for adaptation investment

According to the report, few companies are making adequate adaptation investments after assessing their risk exposure. Further analysis from the CDP report states that companies who have made adaptation investments have seen returns ranging from $2 to $19 for every dollar invested.

Further analysis from the US Agency for International Development found that the benefit-to-cost ratio from flood protection measures for corporations sits at 2x to 7x, and 2x to 6x for water efficiency collection technologies.

In simple terms, companies that do not decarbonise are most likely to face increasing transition risks and forgo the benefits of preparation and mitigation.

It pays to be a climate leader

The advantages of being an early mover for climate adaptation and mitigation extend far beyond growth. Sustainable practices and policies send clear signals to consumers, stakeholders and shareholders, and prospective employees too.

Sustainability frontrunners have reported five key advantages to progressing and leading action:

• Deeper talent pools – 24 per cent of job candidates report they would reject offers from what they consider to be unsustainable companies
• Top-line growth – Sustainable consumer goods grew 9.9 per cent CAGR, driving a third of consumer goods growth
• Saving cash and carbon – Operational efficiencies can cut emissions by 10 per cent, reducing costs and carbon
• Reduced regulatory risk – Companies who reduce emissions by 55 per cent or more could see EBITDA margins improve 2-6 per cent by 2030 compared to those who don’t
• Lower cost of capital - Top environmental performers benefit from a lower weighted average cost of capital compared to their counterparts (though this figure has reduced since 2022).

Overall the message is clear and direct. Organisations that invest in climate mitigation and adaptation are putting themselves in a far stronger, more resilient position for the future.