Firms face physical, regulatory and legal risks from climate change

LIKE ALL human enterprise, business is threatened by climate change. And, as with humanity as a whole, these risks may not become catastrophic for the corporate world for decades. But some corporate citizens will be vulnerable sooner—if they are not already. Global regulators, such as the Financial Stability Board (FSB), want firms to get to grips with the three ways in which the climate affects their prospects

Physical effects of global warming—rising sea levels, drier droughts, stormier storms—imperil factories and other assets, as well as transport and energy links that knit supply chains together. They hurt worker productivity—or, if companies spend on adaptation, like air-conditioning to keep employees cool, increase overheads. A study of over 11,000 globally listed firms found that accounting for physical risks would shave just 2-3% off their market value on average. But the most exposed could lose 20%.

The risk of climate calamities rises imperceptibly quarter to quarter. For most firms it would become material when present-day assets, which seldom last more than 15 years, and bosses, who typically stick around for less, are a distant memory. Even long-term asset managers tend not to hold on to shares for more than a decade. Credit raters and insurers are trying to factor in physical risks when evaluating...



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