Impacts of climate change on business

Anybody still unsure why climate change is an issue for business can read this story where the recent floods in Thailand were cited by Sony as one of the three reasons for turning their $0.6bn profit forecast turned into a $0.8bn loss.

The entire country of Thailand’s growth forecast was slashed from 4.1% to 2.6%.

Pages 8 and 9 of this 2003 report by Swiss Re (report since removed, 2010 report here) show how storm losses and flood losses (see diagrams, right) have been growing exponentially since the early 1980s and by 2002 were around ten times their pre-1970s level.

In 2002 UNEP’s climate working group said that “Worldwide economic losses due to natural disasters appear to be doubling every 10 years and next decade will reach $150bn“.

The impact on insurance industry was considered significant enough to impact reserves, ratings, and solvency.

And without a strong insurance industry, the risks would pass back to business.

Fast forward to 2011 and the reality is that “once in a thousand year” storm surges are expected to happen every 30 years by the end of the century. (Once in 30 year events will also happen more often.) The peak surge height will increase by around 50% compared with today. Resulting insurance losses will at least double and possibly increase by 900%.

Even if insured businesses will find it takes a long time to recover from such disasters. Customers and suppliers will also find their business affected. And we will all be affected by the increased insurance premiums.

Go back now to 2009 and this report by the ‘Economics of Climate Change Adaptation Working Group’ (a partnership between  Swiss Re, McKinsey and others) looks at “climate-resilient development”.

It finds that “significant economic value is at risk: if current development trends continue to 2030, the locations studied will lose between 1 and 12 percent of GDP as a result of existing [emphasis added] climate patterns.” (Page 11)

Given that weather patterns will worsen by 2030, the real impacts are going to be far worse.

And following an ‘adaptation’ strategy like this (strengthening buildings, using more fertilisers, creating improved “disaster relief and emergency response programs”) is like putting mattresses at the bottom of a cliff as a way to solve the problem of people jumping off! It is only expected to address between 40 and 70 percent of the anticipated losses to 2030. And it does nothing to stop the ever-worsening of the situation.

The report (written in 2009) focuses on ‘developing’ countries, so we might think that we in the west are safe. Reality in 2011 has been “biblical” floods in Australia, similar flods in Thailand, together with the worst drought for 80 years in the USA and in some parts of Europe subsidence caused by drought becoming the costliest ‘natural’ insurance risk. (Summary here/full report here.)

This shows that the effects of climate change are significant, unpredictable, and can impact any part of the world.

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Finally, this chart from page 22 of the report shows how temperature changes are expected to impact different sectors over time.

The right hand part of the chart should have been coloured red instead of green, because it fails to point out is that any change above 1.5 – 2 degrees will have major impacts on: storms, flooding, droughts, forest fires, heat waves, leading to impacts on food, water, and climate refugees.

This means the end of business as usual for any organisation that has people as customers or employees.

Another chart shows more detail of this here.

(“An estimated 3.4billion people are threatened by storms, floods, drought, and other ‘natural’ hazards…. Climate change could put at risk many more.“)

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