In 2022, the World Economic Forum identified extreme weather as the most likely risk to become a critical global threat over the next two years. However, the risks for individual corporations will vary widely from firm to firm. These can be categorized into two groups: physical risks and transition risks.

Physical risks

Physical risks include damage to property, infrastructure or inventories, business interruption and increased operating costs.

Which sectors face the most immediate physical risks?

Agriculture

Droughts, floods and heatwaves can cause significant damage to crops, livestock and fisheries, leading to food shortages, price hikes and loss of revenue.

Leisure

Ski seasons are getting shorter as rising temperatures reduce snowfall. Almost all U.S. ski resorts could see a 50% shorter season by 2050, and up to 80% by 2090.

Construction

In winter and summer, extreme weather conditions can affect many aspects of the construction process, compromise the health and safety of workers, delay projects and raise costs. New buildings must also be thermally efficient and climate-resilient.

Retail

Changing weather patterns and more frequent and extreme events disrupt supply and distribution chains, impairing business performance, limiting availability and raising prices, as well as disrupting business continuity and endangering employees.

There are also direct physical risks to stores and warehouses.

Pharmaceutical

Reliance on global networks for manufacturing and distribution makes pharma companies especially vulnerable to unexpected weather events and other climate change effects.

Transition risks

Business-related transition risks arise from the global shift towards a low-carbon economy and fall into four main categories:

Policy and legal risks

Government policy can greatly impact the transition risks some companies face.

Consider government mandates to phase out conventional petrol or gas powered cars in favor of EVs; or imposing variable forms of carbon taxes or incentives to adopt new greener technologies such as heat pumps, solar panels and wind turbines.

On the legal side, climate-related court claims against organizations have more than doubled since 2015 and may continue to rise as climate change and its contributing factors cause more costly damage and loss.

Technology risk

Technology is helping drive the transition to a lower-carbon economy and can potentially accelerate the replacement of certain products such as gas-fired boilers or petrol- or gas-based generators. While this shift represents risks for some firms, it can also create opportunities for others.

Market risk

Changing consumer behavior and shifts in supply and demand for raw materials, products and services can increase prices, with 69% of consumers globally changing their consumption habits because of climate change.

As policymakers work to influence consumer behavior with incentives and mandates, consumers themselves are becoming increasingly aware of climate change. Technology is driving new products to market to meet this transition.

Reputational risk

With corporations under pressure to demonstrate their contribution to a greener economy, 69% of people expect CEOs to do more to address environmental issues.

Are there any upsides to report?

Climate change can also present companies with opportunities for growth through the exploitation of new technologies, regulations and markets.

For example, manufacturers and providers of renewable energy products, such as solar panels and wind turbines, have the potential to grow faster in a greener economy. Equally, oil and gas companies could manage their own transition risks by moving into renewable energy or electric vehicle charging.

As companies pivot to reduce their carbon emissions, many are also developing products that have a lower carbon footprint or are more sustainable. This could lead to higher sales or revenue, especially as consumer trends change, and enhance a firm’s reputation with customers and employees.

So, as you can see, it’s not enough to simply report the impacts of climate change. Take steps today to assess the impact of climate change on your business strategies. When you understand your risks fully, you can learn how to reduce them and even drive growth by adjusting your strategy.