What is Climate Change? And, What does it mean for Business?

Climate change refers to a significant change in global temperature and weather patterns such as, precipitation, wind patterns and other measures of climate, which occur over several decades or longer. Whilst climate change can be natural, due to the sun’s activity, or earth cycles, it can also be caused by human activity.

Climate change, as we commonly refer to it, is considered to be the change to the planet caused by human influence, due to the high levels of emissions of greenhouse gases, like carbon dioxide. The levels of greenhouse gas emissions have risen rapidly since the industrial era, which has in itself driven economic and population growth. And combined, the growing population and human activity is putting unprecedented pressure on the Earth’s planetary boundaries, leading to an increase in frequency and severity of natural climate events.

Johann Rockstrøm of the Stockholm Resilience Centre gives an overview of the current state of climate change below in his video titled ‘The Tipping Points of Climate Change — and Where We Stand’

The Tipping Points of Climate Change — and Where We Stand | Johan Rockström | TED

Unfortunately, it paints a dire picture. The increase in temperature, and increase in frequency and severity of climate events, like floods, and wildfires is bad. Together with our growing consumption of ecological resources, this places us and business in a concerning position.

For example, as of 2024, the population on this planet uses the equivalent of 1.75 planets to provide the resources necessary to produce goods and absorb waste. Put simply, it takes the Earth one year and nine months to regenerate what we use in a year, and for so many businesses this is a concern. We are extracting resources, faster than they can be replaced.

Check out footprintnetwork.org for more info

We are consuming resources faster than the Earth can replenish them!

And, this drive for consumption is further driving climate change. It’s a loop.

Unsurprisingly, we find ourselves in a position where Earth’s systems and processes have been irreversibly influenced by human activity, and now the consequences of economic growth (based on models that did not take the true cost of growth into account) are being felt across the globe. This impacts the way we do business.

But, what does this mean for business?

What Impact Does Climate Change Have On Business?

Climate change raises a variety of risks for businesses. Whilst this will vary across businesses and sectors and regions, broadly speaking, climate change will cause businesses to suffer from more volatility, uncertainty, complexity, and ambiguity (VUCA), which will challenge their ability to do business-as-usual.

Here are six broad risk categories and impacts that climate change has on businesses; 3 of which are strategic risks, and 3 of which are operational:

Strategic Risks:

⚠️ Brand, Reputation and Key Stakeholder Relations

⚠️ Business Model and Value Proposition

⚠️ Stranded Assets

Operational Risks:

⚠️ Operational Disruption

⚠️ Input Price Rises (Price Volatility and Regulatory Compliance Costs)

⚠️ Productivity and Employee Engagement

Strategic Risks

Let’s start by looking the 3 strategic risks referred to above:

Strategic

⚠️ 1. Brand, Reputation and Key Stakeholder Relations

The rising awareness of climate change amongst consumers is changing buying behaviours and attitudes amongst customers. Customers and other stakeholders are increasingly sensitive to companies’ environmental impact. Businesses that fail to address this may suffer reputational damage, reducing customer loyalty and market competitiveness as customers flock to organizations that are more climate agile.

Financial stakeholders, including investors, lenders, rating agencies, and insurers, are increasingly expecting businesses to actively address climate change risks and opportunities. With an increasing expectation on financial transparency there is a growing call of Investors and stakeholders asking organizations to provide consistent, comparable data on their climate performance over time, through 10-K and Sustainability Reports

⚠️ 2. Business Model and Value Proposition

Stakeholders are interested in how companies are ensuring that their business models can withstand long-term climate risks. This includes diversification into climate-resilient products, services, or geographies.

Sustainable business models factor in climate change. Whilst they still factor in Value Creation, Delivery and Capture, they do this with more of a focus on the social, environmental, and economic value created, compared to traditional business models. Aka with more of a focus on 2 of the 3Ps: People, and Planet as well as Profit.

Purpose Driven Organizations do this by looking at the impact on the 3Ps across their customers, communication, distribution and sales channels, partnering relationships, key resources, and key focus activities, as well as there cost structure and their revenue streams. Examples of these include, better personalisation, closed loop or circular models, asset sharing, and agility to withstand a VUCA environment. For example, a circular business model supports the planet be re-using products or components of products at end of life to reduce waste to landfill. They can also do this through the generation of new business models. Take for example, TreeApp the site that allows users to plant trees for free for watching ads. So, by watching ads, it means you’re actually planting trees. 🌳🌲🌴

⚠️ 3. Stranded Assets

Stranded assets are those that have become unusable or significantly less productive and so have lost their value or have become obsolete due to changes in the market. This can be the result of climate change causing a change in the regulatory environment, or, alternatively, such as though technological advancements. The impact of stranded assets on businesses is significant, affecting the organizations, financial performance, strategic direction, and long-term sustainability.

The decreased asset values and reduced returns can lead to financial losses. An example, is a drive to reduce carbon emissions meaning that carbon intensive assets, like coal plants, are losing value. This can result in write-downs or impairments on balance sheets.

Further to this, institutional investors, pension funds, and asset managers are increasingly factoring in climate risks when making investment decisions. To add insult to injury, organizations with significant stranded assets may face higher borrowing costs, reduced access to capital, or even divestment by investors focused on sustainability or ESG criteria / or ESG aligned portfolios. To make this even worse, credit rating agencies may downgrade the creditworthiness of organizations heavily invested in stranded assets due to the increased risk of financial instability, further increasing the cost of borrowing, and placing even more financial strain on the organization. …..Financial spiralling…

And, now let’s look at the operational risks.

Operational

⚠️ 1. Operational Disruption

Climate change affects each organization and industry differently. Some will suffer a higher impact to their bottom line than others. Extreme weather events can damage critical infrastructure, such as roads, ports, and factories. This leads to delays in production, shipment, and delivery of goods.

And slow onset climate related events, such as crop failures, or water shortages, can reduce the availability of raw materials and agricultural products.

Both, extreme weather events occurring over a short period, and the slow onset of long-term events cause supply shortages, price volatility, and increased competition for scarce resources. As well as additional costs associated with repairing or relocating global facilities.

As such, organizations are now expected to conduct scenario modelling to assess how different climate scenarios (e.g., a 1.5°C or 2°C world) might impact their operations, assets, and financial health.

⚠️ 2. Input Price Rises (Price Volatility and Regulatory Compliance Costs)

The price volatility caused by scarce resources and supply shortages, can lead to increased costs for raw materials, particularly in industries reliant on natural resources like agriculture, fisheries, and forestry.

Similarly, there are additional costs associated with unpredictable weather patterns, which may produce lower yields, and so drive up commodity prices for agriculture products.

Also, the enhanced need for reporting and associated regulatory compliance, or inherent commercial liabilities are also a factor of price rises. For example, energy and utility companies that deal in fossil fuels have been targeted with lawsuits to hold them accountable; a liability of operating the business they do. Rapidly evolving emissions-related laws and other regulations can leave your organization open to legal action or local fines. All of which will increase insurance premiums for your organization or your supply chain.

Finally, extreme weather events and changing climate conditions can disrupt shipping routes and transportation networks, causing delays and increasing fuel consumption. This again results in higher transportation and logistics costs for businesses.

⚠️ 3. Productivity and Employee Engagement

It’s not just power outages during storms that reduce your productivity, nor is it the lack of resources for production, nor is it simply staff shortages due to disaster displacement that affect productivity.

Climate change also directly impacts the workforce, through employee health and well-being. It’s estimated that 4 in 10 non-elderly workers are in occupations with heightened climate-related health risks. Exposure to poor air quality, extreme heat, or wildfire smoke can lower cognitive performance and workforce engagement, while conditions like eco-anxiety affect mental health.

These climate-driven health impacts also have broader financial implications for companies. Higher healthcare costs for conditions like asthma and chronic illnesses, lower productivity, and increased injury or disability costs all burden employers. Extreme heat alone is already responsible for 2.5 billion lost labor hours in the U.S. annually, and 490 billion globally, underscoring the far-reaching consequences of climate change on labor availability and business performance.

Conclusion

In conclusion, climate change presents significant challenges for businesses, ranging from operational disruptions to strategic risks like stranded assets and rising costs. The increasing frequency of extreme weather events and resource shortages is pushing organizations to adapt their business models, protect employee well-being, and mitigate financial risks. Those that fail to act will face rising costs, reduced competitiveness, and potential reputational damage.

Now is the time to strengthen your climate resilience and future-proof your business.

Look out for the concluding reflective article on the activities that businesses need to take to build a climate resilient business and thrive in a changing world!

And, check back weekly for more guidance on sustainability and leadership.

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