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Climate, Part II – Indirect Ways the Environment Might Affect Your Business

In the last blog post, I discussed some of the direct effects of global warming and the implications that these have for businesses. In this post, I’d like to look a bit more at the indirect effects and what businesses will have to consider as the economy is shaped by our changing environment.

After “extreme weather”, the second most likely risk factor cited by The Global Risks Report 2020 was “climate action failure”, which is defined as “The failure of governments and businesses to enforce or enact effective measures to mitigate climate change, protect populations and help businesses impacted by climate change to adapt.” It’s worth unpacking this description a bit, as there are quite a few implications for businesses as to what eventually happens as a result of this failure.

But first, a short story: I’m often in Houston for business and started going to an independently owned supermarket there to buy certain products that I have trouble finding elsewhere. However, on my last trip out, I found that the store had recently closed. I happened to be there at the same time that one of the owners was cleaning out the store and spoke with him briefly about it.

I was told that, aside from personal considerations, one of the biggest reasons they decided to close was a perceived increase in crime in the area. He told me something that I had heard from other Houston residents – that there is a perception that crime has worsened since Hurricane Katrina, and that some of the 250,000 people brought in from New Orleans are partly to blame.

Now, this belief is not one that really holds up to testing; there is little evidence of a city-wide increase in crime, nor can it be objectively demonstrated that increases in crime can be tied to the Louisianans that came in. On the other hand, I don’t believe this view has been tested on a neighborhood level, which is really the unit of analysis that matters to my former grocery-store owner. In addition, while it might not be easy to correlate Hurricane Katrina refugees to an increase in crime, the very perception that there was a correlation has increased tensions in the city. This is on top of the clearly demonstrable costs that the city had to undertake to assist and integrate this population.

In other words, it is unfair to blame climate refugees for increasing crime. But, as the number of worldwide climate refugees rises, the social and economic issues that are created by this population transfer will directly impact local businesses in communities hosting them – not to mention the communities from which they flee.

As in the previous post, this is an example of how discrete events affect individuals, albeit indirectly. However, it’s worth considering how climate change not only exacerbates the number and severity of these discrete climate events, but also causes broader changes that alter entire ecosystems. The long-term economic effect of this last point should not be underestimated; as the McKinsey Global Institute put it: “Socioeconomic impacts are likely to propagate in a nonlinear way as hazards reach thresholds beyond which the affected physiological, human-made, or ecological systems work less well or break down and stop working altogether. This is because such systems have evolved or been optimized over time for historical climates.” As these “thresholds” are approached (for example, as agricultural yields begin to decrease in certain regions due to the inability of historically viable crops to tolerate local temperatures), the effects will begin to reverberate through local economies.

These negative effects will be more pronounced in places with warmer climates, such as Texas, which will already have to deal with more frequent and destructive hurricanes. However, given our globalized climate, it’s important to take into account not only local effects, but the effects in areas that our local economies trade with most heavily. And in that sense, Texas is at an additional disadvantage when compared to other US states, as over 30% of Texas imports come from Mexico.

This is where the concern regarding government failure becomes even more pronounced. If the federal and local governments in the US, with their relatively substantial resources, have difficulty dealing with the effects of climate change, then how would a middle-income country like Mexico fare? The fact that countries closer to the equator will suffer greater effects from climate change complicates the situation further, as does the fact that Mexico faces a number of difficulties specific to its geography, such as widespread drought.

On top of these effects, the political repercussions of climate change are worth mentioning. For one thing, the increasing number of climate-related events is generating increased concern among the population. In addition, younger generations in the United States are more concerned about climate change than older ones. These two realities will almost certainly lead to increasing legislation, with accompanying taxation, in the coming years.

Of course, on an individual basis, every company will need to consider just how climate change will affect their business. If you are based in Boston and do most of your business in Canada, climate change might actually have net-positive effects in the long-term. However, if you work with many companies in South Asia, you may need to consider the climate-related risks that you are exposed to through your clients and vendors.

The role of companies in assessing climate concerns has become more clearly defined over the last few years. Many organizations have now empowered (and required) their board of directors to guide the development of their businesses with the effects of climate change in mind. To this end, a great deal of freely accessible material has been prepared to educate on the matter; I’m particularly fond of “How to Set Up Effective Climate Governance on Corporate Boards: Guiding principles and questions,” again prepared by the World Economic Forum.

These considerations are even more important because, as I mentioned in the last post, the insurance industry is still struggling with how to deal with them. In addition, many of the risks discussed here may be difficult to get insurance coverage for in the future – or indeed, they might not be risks that insurance is even designed to address. Either way, advance planning is necessary, because insurance products to help mitigate climate-related risks might not be available or affordable by the time they become necessary, and no amount of insurance consulting will be able to make a difference.

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