The Hidden Cost of Climate Change

Written by: Amanda Price

What will have to happen if companies are to take climate risk seriously? The signs are clear and are on all sides. It would make sense not to worry if business was ready to respond to those impacts. But the truth is they are not.

A survey conducted by ClimateWise indicates that only 30% of the costs related to climate events are assured. More importantly, a survey of 28 global insurers indicates that future costs may be too much, making some regions of the globe “unsafe.” We know that this reality will have a disproportionate weight for the emerging economies, whose infrastructures and monitoring systems have followed in the past.

Another study, conducted by WayCarbon using data from the CDP Supply Chain in Latin America, indicates that a large number of companies remain unprepared to deal with climate risk. Finally, in addition to physical hazards, mitigation objectives indicate that actions and investments to reduce greenhouse gas (GHG) emissions must be in line with the scientific conclusions of limiting global warming by 2 ° C. And if companies are not acting, governments are.

In the world, there are already 40 jurisdictions putting a price on carbon through taxes and markets. As material as a physical impact, carbon pricing will soon be reflected in financial statements affecting, positively or negatively, the business outcome.

If all these signs do not seem enough to take the private sector out of inertia, perhaps even unknown costs can give that missing “push.” This article therefore seeks to bring to light some elements that go beyond the scope of the discussion on climate risk management.

The investor’s voice

The first hidden cost comes from the sector that has undoubtedly contributed to major evolutions in the corporate sustainability management agenda. Moneymakers have already understood that climate change will impact the economies in a cross-cutting way. More specifically, the impact will be on ROI and ability to repay debts. This in-turn will affect the management of fiduciary responsibility of the funds with their quota holders.

The investor agenda will overwhelmingly put pressure on climate risk management practices. TCFD’s financial institutions account for $ 81.7 trillion in assets and include Bank of America, BlackRock and Citigroup.

Cost of bills

Another constantly neglected cost is related to the private sector’s responsibility for adaptive capacity building. Especially in emerging economies, governments will not be able to make the necessary investments. In other words, channeling private resources to close the financing gap for building climate resilience will be critical.

According to the World Economic Forum, this change will require that the annual global investment of $ 5 trillion in “traditional” infrastructure be reverted to investment in “green” infrastructures. In addition, it will be necessary to mobilize US $ 700 billion annually. In turn, the International Finance Corporation (IFC) estimates investment opportunities in the order of $ 23 trillion between now and 2030. It will be up to companies to look at investments in resilience as a medium-term cost or as an opportunity today.

Eventually, the pressure will be governmental

According to some experts, investors and their own pocket are not enough reasons to act on climate risks. With this in mind governments are already moving to compel companies to know and report their climatic exposure and related socioeconomic implications.

Following the trend, the UK government should also take action. In February 2018, several ministries pointed to the need for transparency in the identification and management of climate risks. A regulatory push seems to be closer than a person might think.

Myopia or calculated risk?

A short view that puts climate risk as a long-term element, far removed from quarterly results. In this context, the unison diagnosis is always the lack of information and the need for engagement to show the relevance of the theme.

Let’s make a parallel with the irresponsibility of driving. Driving involves a complex combination of automatisms, reflexes, experience and, above all, attention. When we drive and use the cell phone, for example, we take a risk that we consider knowing. After all, it’s only a second in which we stare at the small screen.

Obviously, we have a certain perception of what is happening. A lateral perception of cars, pedestrians and signs. This is so true that even though people are constantly driving and using their phones, the vast majority of people are well on their way to their destination. But what happens to the ones that do not arrive? And, more importantly, to what extent did it reach the destination was not due to the role of third parties who had to redouble their efforts to avoid the worst?

When it comes to climate risk, companies are driving and using the cell phone (perhaps also picking on the sound and chatting with the passenger). There is a misperception that everything is under control, the risks are known and, if necessary, an individual can apply brakes or take a sharp right turn to deviate from the obstacle. They see signs, they have perceptions, but they cannot really see all the elements that make climate change as relevant as the other strategic risks.

In the case of the climate, however, it is worth aggravating : if in the third traffic can deflect or brake for an individual, in the management of the climatic risk the capacity to act is, exclusively, the responsibility of the company and cannot be outsourced.


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The Hidden Cost of Climate Change

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