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Climate change and the global push for sustainability are uprooting traditional definitions of business risk, and that’s putting a bigger spotlight on how organizations across the world manage their waste. Due to climate change’s projected influence on supply chains, policies and regulations, customer demand, and even access to capital, the company that demonstrates the capacity to embrace environmentally friendly operations and seize opportunity in the markets that drive this shift is the company that will be deemed valuable to the market.
Larry Fink, Chairman and Chief Executive Officer of Blackrock Holdings said it best in his 2020 annual letter to CEOs, “Climate risk is investment risk. Over time, companies and countries that do not respond to stakeholders and address sustainability risks will encounter growing skepticism from the markets, and in turn, a higher cost of capital.”
But what are some of these areas that are at risk and how exactly can they affect business and the economy?
Carbon intensive industries, like the coal industry, are already facing higher rates in the bond markets due to concerns about future carbon-related costs and widespread economic impacts. Today, carbon emissions in the U.S. cost the economy about $250 billion every year.
Certain weather events, including droughts, floods and hurricanes, show evidence of being more severe in a changing climate, disrupting supply chains, including manufacturing facilities and transportation networks. This, according to 215 of the biggest global companies, escalates the anticipated risk for business to approximately $1 trillion, an impact likely to hit within the next 5 years.
Rising sea levels, floods, and greater storm intensities can damage corporate assets or render them inoperable for extended periods of time—and these incurred losses grow by the day. For example, between 1978 and 1997, the total estimated economic cost of such climate-related disasters worldwide was $895 billion (in 2017 dollars). From 1998 to 2017, the cost was $2.25 trillion. That’s a 151% increase.
Cap and trade programs, carbon taxes or direct regulation impose additional costs on certain carbon-intensive industries making low-carbon businesses more competitive. This is largely due to how far behind we are. If we don't significantly reduce emissions within the next few years to reach safe levels and stay within our budget, we'd have to meet the 2050 deadline of carbon neutrality (i.e. a necessary point of balance where climate pollution is offset as quickly as it's produced) at least 20 years earlier.
Companies that fail to act on climate change may face negative publicity leading to reputational damage and lower demand for products and services. This in turn lowers company valuation, especially when half of all U.S. individual investors practice sustainable investing and 80% of institutional asset owners use an ESG (Environmental, Safety, Governance) lens in their investment process.
Low-carbon products and services can claim a competitive advantage in markets driven by favorable government policies and increased consumer demand. One study found that 42% of U.S. and UK consumers say that products that use sustainable materials are important in their day-to-day purchasing.
While many of the above impacts may seem distant, that is not the case. The world's climate system is nearing a tipping point, and recognizing the urgency of the situation can lead to more timely decision-making.
Businesses are often seen as the culprits, but they can instead be leaders in a global change for the better. After all, the situation is dire, it’s not hopeless—not yet. But what can be done now? One of the bigger answers is better materials management.
To learn more about climate change and how materials management combats it while benefitting businesses, download our eBook.
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