Climate risks are set to slash corporate earnings. Here’s what CEOs and boards can do

With many climate commitments focusing on the year 2050, people could be forgiven for thinking there is still some time left until we need to act.

Experts disagree. And for businesses that fail to address growing climate risks now, there will be steep financial losses throughout the coming decade, according to two new reports from the World Economic Forum.

The reports – the first from the Alliance of CEO Climate Leaders, and the second written in collaboration with leading Earth system scientists – outline some stark findings for business leaders.

Alongside, they set out how organizations can work to decarbonize, safeguard nature and build resilience rapidly.

Businesses that fail to adapt to climate risks could lose up to 7% of annual earnings by 2035, the reports find. That’s the equivalent to the economic impact of COVID-19 every two years.

Extreme heat and other climate hazards are expected to cause $560–$610 billion in annual fixed asset losses for listed companies by 2035. Telecommunications, utilities and energy companies most vulnerable.

Companies that fail to decarbonize face mounting transition risks: up to 50% of profits by 2030 in heavy-emitting sectors. For the average listed company, climate-driven losses equate to a drop in earnings of 8.1-10.1% per year by 2045.

Companies likely underestimate the financial impact of these risks, the research says. But, combined with the related effects on supply chains and communities, they highlight the urgent need for businesses to build resilience strategies.

The business case for collective action is clear, the reports say.

Businesses investing in adaptation, resilience and decarbonization are seeing tangible returns – up to $19 in value for every dollar spent.

And green markets are projected to expand from $5 trillion to $14 trillion by 2030.

This presents one of the most significant long-term opportunities for growth in modern history with opportunities for early movers to gain a competitive edge, according to the research.

The advantages span a range of areas, including deeper talent pools with sustainability being a “top magnet for talent”; savings of both cash and carbon as carbon costs rise; and reduced regulatory risk.

The two reports – The Cost of Inaction: A CEO Guide to Navigating Climate Risk, produced with support from Boston Consulting Group (BCG); and Business on the Edge: Building Industry Resilience to Climate Hazards, produced with support from Accenture – provide a roadmap for companies as they move forward.

CEOs must embed climate risk into their corporate strategies, according to The Cost of Inaction: A CEO Guide to Navigating Climate Risk.

The research from the Alliance of CEO Climate Leaders, which includes 131 global CEOs representing 12 million employees, presents a guidebook to help leaders act quickly.

This includes four core actions:

Ultimately, this work will help move climate risk from a compliance effort to the heart of the leadership agenda, permeating all levels of organizations, the report says.

This chart from our Business on the Edge report outlines other recommendations and enablers to tackle everything from avoiding economic loss to protecting revenue and communities.

Business on the Edge: Building Industry Resilience to Climate Hazards helps leaders understand supply chain risks and best-in-class responses to those risks.

It outlines clear actions businesses can take – to safeguard revenue, reduce maintenance and operating costs and protect workforces and local communities while supporting the ecosystems.

The cascading economic and societal risks for business are complex and interconnected, the report says, but they can be understood in three ways, which can guide how businesses respond. These are direct operational costs, supply chain disruption, and instability in nature and society.

The research proposes a roadmap of recommendations and business enablers for C-suite executives, boards and investors. It says every business leader should be activating within the next 24 months to drive better executive-level decision-making:

With the planet already facing irreversible tipping points, the frequency and severity of climate hazards with a direct impact on business and societies globally will continue to grow.

“This is a decisive moment for leaders to act boldly and collaboratively, ensuring their organizations can adapt in a rapidly changing world,” Gim Huay Managing Director and Head, Centre for Nature and Climate, World Economic Forum, says about the two reports.

By addressing climate risks head-on now, businesses have an unmissable opportunity to build stronger and more sustainable operations while safeguarding societies and the planet.