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Addressing The Trillion-Dollar Cost Of Climate Change

In The Headlines

What’s the cost of climate change?

For 215 of the world’s largest companies, it’s $1 trillion.

According to an analysis of 215 of the world’s 500 largest corporations by the CDP, an international nonprofit that encourages companies to evaluate and manage their environmental impacts, many of the businesses surveyed say the effects of climate change will be felt in the next five years.

More than 80 percent of the companies analyzed by CDP have said they’d be affected by climate change, including shifts in atmospheric and oceanic patterns that enhance the prospect of extreme weather events, rising global temperatures, and the increased pricing of greenhouse gas emissions. The companies rated half the anticipated impact – $500 billion – as likely to virtually certain.

Among the largest risks identified include higher operating costs associated with legal and policy changes. There’s also the potential for $250 billion in losses due to the unexpected or premature write-downs of assets that are significantly exposed to the effects of climate change or are raw materials such as fossil fuels, whose value might suffer from the transition to a low-carbon economy.

Why Does This Matter?

More and more companies face greater demands from both fiduciary stakeholders and policymakers to reveal potential risks due to extreme climate change effects. The Bank of England’s June 2019 announcement to “stress test” financial companies is just one example of attempting to encourage corporate disclosure related to climate risk.

Aon’s May 2019 Global Catastrophe Recap highlights weather events around the world: severe thunderstorms and flooding in the U.S. that prompted nearly $4 billion in insurance payout; $2 billion in direct economic costs from Cyclone Fani in India; and 1.3 million acres burned in Canada’s wildfire season.

These types of weather events are expected to become increasingly more volatile because of further influence from climate change, according to Steve Bowen, director and meteorologist and head of Catastrophe Insight at Aon. “In conjunction with a more volatile world of weather events, the known shifts in global socioeconomics and population trends are only going to raise the humanitarian and financial risks in the years to come,” Bowen says.

These risks are requiring industries to work together to find ways to increase business and community resilience to climate change.

Are Partnerships A Path Forward?

Greg Lowe, global head of Sustainability and Resilience at Aon, says cross-industry collaboration is essential to addressing the risk. “These extreme weather events are forcing insurers to help identify ways to manage climate change risks,” he says. “Solutions can be developed by working together with groups ranging from lenders to policymakers to manage and reduce the various risks posed by climate change.”

While the financial risks of climate change are enormous, companies examined by the CDP also noted opportunities. These companies identified upward of $2 trillion in climate-change-related business prospects, such as customer demand for low-emissions products and services. “Whether a company overhauls its operations to become more sustainable or new entrants build innovative solutions to address the risk, climate change will impact the balance sheet,” states Lowe.