Climate change is going to have a significant impact on our lives. Though many of us are aware that a change needs to happen in order to prevent the worst outcomes from becoming reality, few are able to see the indirect ways that a changing climate is already having a profound impact on our day-to-day activities. Given that the impacts of climate change often appear subtle, it is hard to place the emphasis on changing that we truly need to.
However, climate does and is having a real impact already and is increasing risks across industries. Today, many financial and economic experts consider climate a risk multiplier. Helping people build a greater understanding of these risks and finding ways to mitigate them across industries can encourage implementation of some of the changes that need to be made. This should be a major priority for industry leaders facing these risks.
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Ground-Level Climate Risks
Perhaps the easiest climate risks to understand are those that we can see happening physically on the ground. These are the things we hear about quite often such as rising temperatures and sea levels or crazier weather patterns. They also include bigger storms and natural disasters like wildfires, hurricanes, and heat waves.
These are all considered physical risks of climate change and they can play a direct role in community migration patterns, disrupted supply chains, and business operations that become unsustainable. Businesses stand to lose hundreds of billions of dollars from physical climate risks whether it is through equipment damages, loss of production (especially in the agricultural industry), or major disruptions in supply chains. One recent example of this is the grid failures in Texas caused by extreme cold weather and the failure of businesses to accurately assess and manage that risk.
Another example is the uncharacteristically large wildfires that have occurred in California in recent years. These fires have not only caused enormous economic damage for businesses, but have also resulted in unprecedented amounts of property damage. Given that nearly one-third of American wealth is tied to property ownership, significant property damage can have severe rippling effects on local and regional economies.
Both home and business owners may also realize that the cost of living or operating in certain high-risk areas is becoming too high due to climate risks. For instance, after severe flooding in Florida in 2022, many home and business owners quickly realized that insurance companies were leaving the state in droves and finding insurance coverage at an affordable rate was nearly impossible. This dearth of insurance companies is linked to scientific reports underscoring the climate risk in the Gulf Coast associated with stronger storms.
New Regulatory Standards
All of this evidence of ground-level climate impacts affecting citizens and the economy in a major negative way begets help from the government. Today, all levels of the government from the local to federal level are working to find ways to transition into an economy that is more climate-friendly and possibly even reverses the climatic trends that are taking hold. Although a much-needed investment, it doesn’t necessarily mean the transition is going to be easy for industries.
In order to successfully make the transition towards a cleaner environment, huge policy changes and infrastructure investments will have to be made. The recent Inflation Reduction Act has been hailed as the largest government investment in climate change and seeks to provide billions in incentives for businesses of all sizes to start making the transition to cleaner energy systems and more sustainable production methods. The goal of this effort is to limit the huge upfront investments required to make the transition.
Although the goals of the transition are clear, the path forward tends to be a bit murkier. Many businesses will have to balance making the clean-energy transition without compromising profits, which can be difficult when new technologies are in their infancy and adequate clean-energy infrastructure is still a few decades away. Taking advantage of government incentives can help to bring down the costs of investing in cleaner vehicles or installation of solar or wind systems can make a positive difference.
Market Volatility
Such a large investment and transition has the potential to bring significant boosts to new markets, however, the decline of certain industries could lead to a major shift in investment strategies. In addition, many financial institutions are still figuring out how to rate climate risks and properly price assets to adequately account for those risks. All of this adds up to a high potential for significant volatility in the markets going forward.
For many industries, this isn’t exactly great news and it contributes to more risks associated with the transition to a more sustainable and climate-friendly economy. Many experts believe that financial professionals still consistently under-evaluate climatic risks when they are valuing assets which could lead to major price swings as the market corrects itself and new information becomes available. For most industry leaders, major price swings can greatly impact the availability of essential equipment, the costs of running certain aspects of a business, or even the reasonability of continuing operations in a certain area.
Market trends are influenced by a number of forces such as government policies, financial investors, and supply/demand curves. Although there are some very real risks associated with the transition to a cleaner economy there are also a lot of opportunities. Government policies and incentives have spurred an incredible amount of investment into a greener, cleaner future and this can be a great time for savvy businesses to start taking steps in that direction. As supplies and demands for cleaner technologies increase, the transition is likely to accelerate and industries that are poised to capitalize on that could really come out on top.
Conclusion
Climate poses a number of very real risks to a lot of industries both physically and economically during the transition to a greener system. Smart industry leaders will find ways to take advantage of government incentives to help ease the transition and balance investments in new technologies.
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