Transitioning to a net zero economy will impact every asset class so businesses of all types must take notice. The far reaching economic repercussions of the climate crisis means that businesses can either adapt or die. Those that view sustainability as nothing more than a buzzword will be punished while those who respond to the risks and seize the opportunities will reap the rewards. Sustainability is a culture not a buzzword on a company website. However, as highlighted by the failure of sustainability focused certification schemes, companies are guilty of greenwashing. In many quarters sustainability is little more than jargon exploited for public relations purposes.
However, failure to inculcate the reality of climate change into business strategy is a matter of survival. Businesses that fail to address the threats associated with climate change will be dangerously unprepared for the realities of the world we live in. They will also find themselves in mortal danger.
The Bank of England governor Mark Carney recently told the Guardian that companies that do not reign in their carbon emissions will drive investors away. Carney did not mince words when he warned that firms that fail to address this reality will go bankrupt.
A report from Zurich reviewed the risks to infrastructure and the need for businesses to prepare for rising sea levels associated with global warming. As explained by Zurich, “businesses that don’t build resilience to rising sea levels will get soaked”. They point to a two-fold increase in sea levels between 1993 and 2010 compared to last century. They also single out a study which suggests sea levels could rise more than two meters by the end of this century. According to the U.K.’s National Oceanographic Centre, the costs of sea level rise could exceed $14 trillion a year by 2100.
Mass migrations will result from widespread flooding. The relocation of billions of people will result in major economic and political ramifications. Eugenie Molyneaux, Zurich’s Chief Risk Officer for Commercial Insurance, said, “we are most clearly sleepwalking into catastrophe”.
The World Economic Forum’s Global Risks Report 2019 estimates 800 million people are vulnerable to a rise in sea level of 0.5 meters by 2050. The report makes it clear that we have no time to waste. The impacts on business from the full range of climate related risks are extensive. They range from damaged infrastructure to supply chain disruptions.
Failing to act would have severe consequences on the global economy virtually guarantying that shocks to the financial system will cause the sudden collapse in asset prices. Carney pointed to US coal companies that have lost 90 percent of their value. He also indicated that banks with too much exposure to companies on the wrong side of the climate equation are also at risk. According to Carney corporations have a couple of years to act before global regulators advance compulsory regulations.
Carney also expressed concern that the longer we wait to make the required global transition the more likely we are to experience abrupt financial collapse. Carney pointed to extreme weather events and government regulations leading to asset devaluation. He warned that that are $20 trillion worth of assets at risk if we fail to address climate change. He also pointed to big upside potential from those involved in climate action.
While there are serious risks there will also be massive rewards for those who are part of the solution. The Zurich report reiterates the findings of many other cost benefit analyses. There is little doubt that the benefits of climate action far outweigh the costs. The Zurich report indicates that spending on recovery is five times as great as spending on prevention. “The numbers speak for themselves and should be convincing in their own right.” Molyneaux said. “Investing one dollar in prevention can save up to five dollars of recovery.”
There will be vast opportunities to invest in renewable energy and other clean technologies. There will also be massive demand for capital to address vulnerable infrastructure, including energy plants, water treatment facilities, communications, and transportation. Coastal cities alone represent multi-trillion dollar opportunities. What is clear at present is that we are not doing anywhere near what we must to minimize the threat and prepare to adapt to it.
According to Carney we need to see innovation, artificial intelligence in energy systems and more reliance on advanced materials like graphene. Companies need to look beyond their immediate business activities and conduct strategic reviews. They need to carefully review their supply chains and conduct scenario planning to assess their risk exposure.
If we are to succeed in keeping temperatures below critical thresholds we will need to act with urgency but we will also need to at collaboratively. Every strata of society from politicians, to businesses and academics, must come together to devise global strategies.
We need to minimize risk through preventative planning and infrastructure investments. Sustainable investment can offer better returns on investment over the long term. However, there is a tremendous shortfall. The G20’s Global Infrastructure Hub projects a gap of $18 trillion between current investment trends and the level necessary by 2040.
While corporations should be moved by the benefits of climate action including competitive advantages, the climate crisis needs to be understood as a risk that threatens the survival not just of individual businesses or even business sectors, this is a threat to our entire our economic system. The FT reports that James Gorman, the CEO of Morgan Stanley, made the extent of the threat clear when he told a US congressional committee, “If we don’t have a planet, we’re not going to have a very good financial system.”
The importance of action cannot be overstated. Failure to engage is not just a threat to an individual firm it also represents a wider threat to society at large. What is required is a paradigm shift that assigns value to a stable climate and challenges our obsession with short term profit horizons.
“So, you might be able to deliver short-term profit, but long-term sustainable value creation can’t happen that way…Ignoring this is impossible,” says Halla Tómasdóttir, CEO of The B Team, “The system that we have operated in has been so focused on short-term profit creation at the expense of people and planet that this approach is no longer an option.”
In response to the very real threat we face sustainability and sustainable finance have become mainstream phenomena. Companies are faced with an existential choice, they can either work towards global solutions or incur risks that may contribute to their demise. They must also understand that if they fail to meet this challenge they will be swallowed by a devastating economic tsunami.