For a considerable period, adaptation and resilience have often been secondary considerations within broader climate discussions. Many climate advocates believed that an excessive focus on preparing society for the physical effects of climate change risked diverting attention from efforts to reduce emissions. For businesses, assessing the actual costs of climate change was deemed too complex to quantify, and the potential damages appeared too far in the future.
That is no longer the situation. Physical risk and resilience were frequently discussed topics last week by many executives who convened in New York for Climate Week. As climate change accelerates, the financial implications of its impacts—which can disrupt supply chains and halt operations—have become increasingly evident to businesses. Despite this, experts working at the intersection of climate change and finance indicate that both companies and markets still fail to fully comprehend the extent of these risks.
Jamie Franco, head of cross-asset research and sustainable investment at TCW Group, an asset manager, stated during an MSCI-hosted Climate Week panel: “When engaging with our investment team, we generally operate under the assumption that physical climate risk is incorrectly valued. It’s already part of your holdings. You are, in essence, operating without full visibility. It becomes necessary to integrate the imperfect data available and consider it from the perspective of the specific asset being invested in.”
For corporations, there is no straightforward remedy. Firstly, addressing this issue requires forward-looking data and modeling capable of clearly pinpointing where the risk lies. An even greater challenge is garnering the institutional resolve to dedicate a company’s limited capital to resilience initiatives that yield future cost savings, rather than the more immediate returns offered by substantial growth-oriented financial investments. However, pressure to do so will intensify in due course. As expenses continue to mount, companies will experience increasing demands from investors and other stakeholders to seriously confront the resilience challenge. Proactive companies will be rewarded; those that delay risk being compelled to adapt only when a crisis reaches a critical threshold.
Ostensibly, physical climate risks should not be overly complex to comprehend. Hurricanes, wildfires, and inland flooding already generate substantial annual costs for the U.S. economy. Moreover, it is understood that the intensity and occurrence of these hazards will only escalate over time. Mark Zandi, chief economist at Moody’s Analytics, conveyed during a Climate Week panel I moderated: “The connections between climate change and the economy are simply extensive. This manifests through inflation, interest rates, asset valuations, and migration patterns.”
A considerable portion of these costs will eventually burden corporations. Why, then, have companies not taken actions proportionate to the problem’s magnitude? The issue can be analyzed from various perspectives, ranging from climate denial to human psychological factors, but for the scope of this piece, I will examine it through a straightforward economic viewpoint. In essence, despite imminent risks, the economic incentives for many businesses, individuals, and local governments have not yet become clearly aligned.
Consider this from the perspective of a hypothetical industrial enterprise. Although severe weather events might impact their facilities, the timing of such occurrences remains uncertain. Concurrently, fortifying facilities demands significant investment, funds which could otherwise be allocated to more profitable undertakings. Even a visionary CEO who prioritizes long-term gains over quarterly results might face skepticism from the board or shareholders. Furthermore, in the majority of industries, these efforts offer no advantage to their credit ratings. Lastly, should a significant catastrophe strike, they might be relying on their insurance coverage for protection.
From the viewpoint of an investor employing a broader macroeconomic perspective, it may be evident that climate events will generate economic challenges. However, data indicating which companies are best prepared is still developing and difficult to convert into the quantifiable metrics that inform investment choices. Moreover, even with foreseeable risks, it’s challenging to predict when the market will begin to factor them into pricing.
Nonetheless, during Climate Week in New York recently, it became apparent that a shift in perspective is occurring, at least among the corporations and investors who attended. Businesses are beginning to recognize the expenses associated with persistent climate problems, such as reduced labor output from extreme heat or difficulties in procuring supplies from customary vendors due to climate-related disturbances. Financial organizations are discussing their commitments to initiatives aimed at comprehending the risks confronting their clients. Additionally, an increasing number of investors are starting to inquire about the climate risk present within their portfolios. Lori Goltermann, CEO of regions, North America at AON, a global insurance broker and risk management firm, conveyed on a panel: “The impetus is originating from investors, from board stakeholders, and from employees.”
Evidently, a comprehensive understanding of the evolving climate risk and resilience panorama necessitates more than a handful of Climate Week discussions or a lone newsletter. However, at the core of this matter, one of the most persistent difficulties—for any business, investor, or even property owner—is forecasting precisely when and how climate risk will be financially valued. Regarding this specific question, consensus is scarce. Some have proposed that this will only materialize if and when a significant climate catastrophe impacts New York City, thereby compelling a disruption on Wall Street and a swift re-evaluation of assets. Conversely, others predict a gradual unfolding over time, akin to a slow erosion.
Yet, what everyone concurs upon is the desire to avoid being unprepared when such events occur. This, in turn, will demand foresight and planning.
For delivery of this article to your inbox, subscribe to the TIME CO2 Leadership Report newsletter.
