Cloudy with a Chance of Profits: How Does Climate Change Affect Business?

Weather impacts how businesses operate, often directly. Natural disasters require insurance companies to change their business models, and deforestation raises the cost of raw materials for paper suppliers.

Other changes are less direct and more cultural. Customers react, both positively and negatively, to businesses that change to environmentally conscious practices. With the advancing impacts of climate change, weather-induced buying patterns stand to evolve in new and unexpected ways.

Global Warming and Business: What Happened 18 Years Ago? 

As early as 2001, major corporations, government agencies, scientists and religious leaders began talking in earnest about human-caused climate change and what should be done to address it. Companies understood the threat of climate change even then, as noted in an EHS Today article that said, “A growing number of companies are convinced it is a mistake to ignore the threats – and opportunities – posed by global warming.”

Nevertheless, the approach companies took at the time can prove instructive. One such company was BP, the global oil, gas and energy conglomerate. Scientists had concluded the prime cause of human-induced climate change was the burning of fossil fuels. It was in the best interest of energy companies, then, to position themselves as leaders in the movement and to respond. Together, those companies formed The Pew Center on Global Climate Change and agreed to calculate their total GHG emissions, then set and meet targets to reduce those emissions.

More than 40 companies addressed the problems they saw in their manufacturing processes. They took inventory of their greenhouse gas emissions and explored new ways to save money as well as opportunities to take leadership roles in solving an important global challenge. BP, for instance, reduced its greenhouse gas emissions in 2001 to pre-1990 levels, putting it ahead of its targets and at no cost to its bottom line.

Not all corporate investment in climate change sprang from economic or environmental roots, however. Some of it stemmed from a desire to remain solvent and influential in a world growing increasingly concerned about the effects of the fast-warming climate.

Climate Change Continues Impacting Businesses 

An article in Forbes said, “It may not seem like it yet, but climate change is altering the world so drastically that all enterprises will need to undergo a transformation to avoid going extinct.” Climate change is introducing new economic risks, phasing out old sources of energy, and creating fresh political challenges.

Retailers, such as Walmart, are choosing suppliers who adopt environmentally friendly practices in order to appeal to the final customer. Other businesses are sharing sustainability data with investors because they know it affects profit. Going further, some businesses, such as the European department store Sainsbury’s, are imposing regulations on themselves rather than waiting for the government to do so. All these companies are slowly transforming in an effort to remain solvent and viable in a climate-focused market. 

These adjustments due to climate change’s effect on business, according to management consultant firm McKinsey & Company, are in response to two types of risk: value-chain risks and external-stakeholder risks.

Value-chain risks

The value chain is the process by which a company adds value to a product. This process could include design, production, cost and distribution of a product. For example, a company that extracts raw material from the earth, processes it in a factory, establishes a price and brings the product to market has vested a new value in the original material. Climate change can affect the value-chain at every point along the way.

  • Physical risks: These risks occur when a company’s infrastructure, raw materials or other assets are destroyed or rendered useless due to a weather incident. These risks can include climate-related disasters such as floods, tsunamis and droughts. While no company can reverse an oncoming weather disaster, corporations can prepare for physical risks by assessing their vulnerability and taking steps to mitigate the most likely scenarios.
  • Prices: Climate change can cause the prices of commodities and raw materials to rise as weather-related disasters may render these materials rarer or more difficult to access. The result is lower supply, greater demand and higher prices.
  • Product: As climate change progresses, it could affect buying patterns. For example, consumers may turn to new sources of energy or renewable products, putting standard systems and products out of favor. According to Nielsen, 73% of customers say they would change their buying habits just to have a greater positive impact on the environment.  

External stakeholder risks

External stakeholders are the people who hold an interest in, but do not work for, a business. These stakeholders absorb the risks of increasing costs associated with climate change.  

  • Ratings risks: These risks emerge from the higher costs associated with capital due to climate change. Severe weather can impact country-level ratings, which in turn affects the market rate of interest. This change is usually negative, according to most research.
  • Regulation: As global governments grow more concerned about the climate, they tend to place greater regulatory requirements on companies. These regulations may complicate a formerly simple business operations or even subsidize a “greener” competitor.
  • Reputation risks: Reputational risks are those risks a company assumes relative to its public image. Actions that the public considers negative or that can worsen climate change will likely make a company’s reputation, and ultimately its profits, suffer. 

Case Study: Coca-Cola and Climate Change 

Coca-Cola is one of the world’s largest corporations, and in 2004, it needed an immense amount of water to make its products. Creating each liter of Coke required 2.7 liters of water, which became a problem as climate change started impacting global water levels. Coke faced two distinct, but related, challenges. First, the cost of raw materials was increasing as consumers wanted to pay less for the final product. Second, Coke’s need for water set it directly against the human rights considerations of fresh water access for all. 

Facing the closure of its plants, Coke improved its manufacturing process to use less water. By 2015, the company needed only two liters of water per liter of soda. The company reported using 149 billion liters of water that year, and of that amount, “146 billion liters were treated and returned.” Coke didn’t stop there, though; the company announced its plan to replenish all the fresh water it uses by the year 2020.

The leaders at Coke rose to the challenge of a changing business model and came out the other side as both a more successful company and a more environmentally conscious one. You can learn the skills and strategies used by management in similar situations by earning an online bachelor’s degree in business management. These programs are designed to prepare you to succeed in today’s competitive workforce. The Bachelor of Arts in Business Administration – Management from Illinois College blends a liberal arts education with cutting-edge business practices to prepare you to solve complex problems. Our degree will teach you to think critically, write and speak effectively, work in teams and successfully solve complex problems. Additionally, you’ll study key topics like economics, accounting and strategic management.