Climate risk means a risk resulting from climate change and affecting natural and human systems and regions.
In the course of increasing global temperature and extreme weather phenomena the Intergovernmental Panel on Climate Change (IPCC) has been founded by the United Nations Environment Programme (UNEP) and the World Meteorological Organization (WMO) for a better understanding of climate change and meeting concerns of these observations. Its main aim is evaluating climate risks and exploring strategies for the prevention of these risks.
As per current projections of IPCC the following future effects have to be expected:
- Continuous increase of temperature
- Cumulation of extreme weather phenomena
- Bumper crops and crop failure
- Polar cap melting
- Changes of the planet’s ecology
- Spreading diseases
- Attenuation of the North Atlantic Drift
While affecting all economic sectors, the effect on single continents will differ. Beside these direct physical climate risks there are also indirect derived ones:
- Physical risks
- Regulational risks
- Litigational risks
- Competition risks
- Production risks
- Reputation risks
Direct risks of climate change are expected especially for branches, which strongly depend on natural resources like agriculture, fishing, forestry, health care, real estate and tourism. For example, storms and flooding damage buildings and infrastructure, whereas hot summers with less precipitation cause crop failure.
The governmental endeavours to reduce climate costs have direct effects on economy. For example, the targets regarding emissions within the Kyoto-Protocol shall be realised by implementing emissions trading. By this instrument the value of emissions can be quantified monetarily, approximating the value of avoiding hazardous substances. This value shall be internalized by companies and considered in investment decisions. By considering emission costs the prices for i.e. energy and transport can increase and therefore change consumer demand. The insecurity of legislation leads to indefinite adjournation of projects and investments.
Similar to the tobacco industry, industries producing excessive greenhouse gases are exposed to the risk of an increasing number of lawsuits, if damages can be traced back to emissions, i.e. for floodings, crop failure, etc.
If companies do not take measures to reduce climate risks they are competitively disadvantaged. This might lead to increasing production costs caused by obsolete technologies and therefore to decreasing profits.
Production shortfalls can result from direct or indirect climate risks. I.e. hurricanes damaging oil production facilities can lead to a scarcity of oil and increasing prices. Also the price for energy will rise, because heatwaves cause water scarcity and therefore the supply for cooling water of power plants becomes short.
Companies who are publicly criticized for their environmental policy or high emission rates, might lose customers, because of negative reputation. This risk is currently subordinate.
Besides climate risks also opportunities can derive from climate change for some branches and innovative companies, i.e. for the automobile and renewable energy sectors. Especially energy-intensive sectors can reduce energy costs by using more efficient technologies, which necessarily have to be developed in near future.