Extreme heat could account for 65% of North America’s productivity losses by 2030, Sustainalytics says.
Canada has been ravaged by wildfires since March 2023, causing severe damage and sending smoke as far as Europe. This follows extreme heat, the hottest June in 174 years, and heavy rainstorms in Toronto. These events make me question our world’s readiness for climate change. Extreme heat, often overlooked, has been steadily increasing, with the past eight years being the hottest on record. The next five years are projected to be even hotter, highlighting the urgent need for preparedness.
World leaders have pledged to limit global warming to 1.5 degrees Celsius above preindustrial levels by the century’s end. Crossing this threshold could trigger more severe climate impacts. To achieve this, greenhouse gas emissions must peak before 2025, decrease by 43% by 2030, and reach net zero by 2050. Yet, current commitments suggest we may fall short of this goal.
According to Sustainalytics data, extreme heat could cause nearly 60% of productivity losses for European-based companies due to climate risks. For North American companies, the figure stands at 65%. The Swiss Re Institute predicts that climate change could shrink global GDP by up to 18% by 2050 compared to a world without warming.
The consequences will encompass tangible expenses, including human health, biodiversity decline, asset and infrastructure damage. These will lead to concrete business costs, reduced productivity, and ultimately pose economic and investment risks.
Hope for investors
Investors have a reason to be optimistic. The investment landscape is compelling companies to confront climate change. Notably, the International Sustainability Standards Board’s fresh standards (ISSB) are set to become the global norm. These standards will empower companies to furnish investors with dependable data and enhance regulatory adherence. With growing adoption of this disclosure standard, we can anticipate improved, uniform, financially pertinent data. Enhanced data makes it simpler to evaluate and differentiate various companies.
Emerging tools are aiding investors in countering greenwashing and recognizing opportunities in the shift towards a low-carbon economy. Sustainalytics’ Low Carbon Transition Ratings, for instance, offer multiple indicators to evaluate a company’s readiness to cut carbon emissions. The key measure is the “implied temperature rating” (ITR), which gauges a company’s alignment with a 1.5-degree net-zero trajectory by 2050. A company’s ITR reveals the Earth’s potential temperature rise if all firms surpassed their carbon budget equally. A higher ITR, like 2 or 3 degrees, implies a lack of effort in adapting to the low-carbon landscape. As the transition advances, companies not embracing transformation might face restricted capital and insurance access due to elevated risk perception by partners.
Currently, the outlook isn’t promising. Initial assessments of the top 6,000 public firms suggest a projected global warming of over 3 degrees Celsius.
Good management can brighten the outlook
Effective management and strategic choices offer a promising avenue for companies to prosper and align with a 1.5-degree climate future. Referred to as the “management score,” this metric assesses a company’s prospects of survival and success. While certain industries, such as automobiles, may exhibit unfavorable implied temperature ratings due to fossil fuel use, they also feature a significant number of firms investing in electrification and reducing reliance on fossil fuels.
The management score encompasses a thorough evaluation of a company’s actions, policies, strategies, governance, investments, and more. It allows investors to compare their holdings and funds with peers in terms of decarbonization strategies. This helps in gauging if companies are effectively implementing their plans.
Notably, sectors like telecom services, automobiles, household products, utilities, containers, and packaging display strong management scores, indicating their proactive efforts.
Given the regulatory push, reporting requirements, and societal pressure, businesses must take climate change and related risks more seriously. This includes addressing increased costs, reputational concerns, and legal implications. The urgency is growing for them to swiftly invest in transforming their business models to tackle these challenges.
Source: Morningstar
