Weathering the storm: Business resilience in the face of climate change

Asees Bajaj explores the risks stemming from climate change and considers the manifold challenges businesses will have to contend with as a result of climate events.

In March 2023, the Intergovernmental Panel on Climate Change (IPCC) delivered a final and urgent warning around the need to immediately and convincingly address climate change. The warning was prompted by studies signalling that global warming is expected to bring about more catastrophic disruptions to nature, humans, businesses and countries across all regions if the world continues along its current course of greenhouse gas emissions. With acute, unprecedented and costly climate events on the horizon, mitigating and addressing the consequences of climate change will be critical going forward. 

The manifold consequences

Major cities, agriculture-rich regions, and industrialised locations alike have become increasingly prone to severe weather events such as extreme flooding and lengthier droughts given global temperature fluctuations. In August 2022, for example, Pakistan experienced devastating floods which caused destruction to the country’s infrastructure, housing, agriculture, transport, and communications amounting to over USD 16 billion. The global economy paid a much greater price. In 2022, it was estimated that major weather events cost the global economy USD 313 billion, with only USD 132 billion covered by insurance. 

Businesses are not immune to the manifold consequences of climate change. From an operational perspective, the implications are wide-ranging and can include disruptions to key services, loss of assets, reduced access to essential resources and strained labour markets. There is a regulatory component to consider as well. Governments are increasingly having to foot sizeable bills to rebuild public infrastructure and provide relief to affected communities from climate disasters. And, in order to mitigate the recurrence, regulation around environment and sustainability is growing, with compliance and reorganisation implications for businesses such as disclosing emissions levels, utilising quality construction materials, or investing in low-carbon alternatives. At the same time, to hold businesses and industries accountable for their role in exacerbating climate change, the climate activist movement has gained traction and is increasingly shaping shareholders’ and investors’ concerns. As a result of the real effects of climate change and pressure from stakeholders, with increasing urgency businesses will need to incorporate climate considerations into long-term strategies, although these will vary given wide-ranging sector impacts. A closer look at climate challenges the global aviation, agriculture and events sectors have been navigating provides an understanding of the challenges and costs businesses will have to adapt to and absorb moving forward.

   Aviation

Unpredictable weather, exacerbated by climate change, is the primary source of disruption to the aviation sector. Severe storms, snow and high rainfall levels typically cause airlines to delay, divert and cancel flights. However, a rising concern in the sector is the impact of climate change on critical infrastructure. In 2022, temperatures in Europe rose to record highs over the summer, causing the tarmac on some runways to melt. Storms further have the ability to damage airport control towers’ communications equipment, causing entire airport operations to come to a halt for extended periods. In June 2023, for example, storms along the east coast of the US impacted flying conditions and caused cables powering critical communications equipment to overheat across major airports in New York, New Jersey, Boston, Philadelphia and Florida, resulting in delays and cancellations of almost 8,000 flights. The financial burden of climate change on the sector will be significant, with aviation operators expected to face costs from three avenues: repair costs following severe weather events; costs to implement mitigation measures; and costs to align existing operations with potential climate regulation in the sector.  

Agriculture

On an annual basis climate-linked natural disasters, such as hurricanes, floods, wildfires and droughts challenge agricultural production. In May 2023, record floods in the northern Italian region of Emilia-Romagna submerged over 5,000 farms growing fruit, corn, and grain products which feed into global food supply chains. While in June, wildfires in Canada, which are yet to be contained, have polluted the air and water sources across the country and in northern states in the US, with potential consequences for crop yields and livestock. Studies around extreme weather events predict that not only will the frequency of such events increase year-on-year, but also the severity. As a result, agribusinesses are, and will have to continue, contending with uncertainty from multiple sources of climate-linked disruption along their supply chains. While crop and livestock destruction is the key concern, damaged critical storage infrastructure and hampered transportation links are further challenging operations in the sector.

Global sports and events

The global sports and events sector has also been on the receiving end of climate disruptions. The May 2023 floods in Emilia-Romagna resulted in the cancellation of the Formula 1 Grand Prix at the Imola Circuit. And in June, outdoor events in Canadian cities like Toronto and music concerts in New York City were cancelled due to hazardous air quality levels from the widespread wildfires in Canada. Climate change will continue to manifest unpredictably around weather patterns, with further potential cancellations and postponements for the events industry – which comes at a high cost to organisers, athletes, performers and attendees. As the Imola Formula 1 Grand Prix was cancelled due to force majeure, the event organisers were not required to pay the USD 20 million cost to host the annual race. However, without being able to host revenue-generating carnivals and concerts over the course of the racing event, organisers are unlikely to have recuperated the costs involved in maintaining and operating the circuit, which amount to around USD 19 million annually.  

Business resilience in the eye of the storm

In 2022, US businesses reported that damage to physical assets as a result of climate change amounted to around USD 2.2 billion. Given the significant costs involved, businesses that are unable to adapt and respond to future climate risks will be left behind. Defensive, reactive and fragmented approaches to climate change are likely to be costly and ineffective. For businesses to sustain operations, minimise financial losses, and ensure personnel safety amid the possibility of increasingly frequent and simultaneous climate crises, mitigation strategies will need to prioritise long-term stability over short-term competitive advantage.