Despite recent heatwaves, one of the greatest challenges in addressing climate change is getting policymakers and investors to take action on the grounds of it being an immediate acute risk, as well as a long-term chronic concern.
A growing body of research could be about to change this.
Driving home the immediacy of impacts is a critical step in changing the norms around how we react to problems.
The best analogy is perhaps to understand the difference in reaction to COVID-19 and climate change: covid was happening to everyone and immediately, while climate change has for many years been seen as something that will happen in the future, and to people far away.
While not actually true, this has been the overarching message for decades.
Action requires understanding of immediate impact of climate change
Immediate impact is easiest to understand in agricultural terms – droughts and floods have a direct impact on produce price, insurance claims increase and there is a significant risk of cascading effects.
Yet with farmers in developing countries disproportionately affected, for the last couple of decades, it has been easy for policymakers, investors and corporates to ignore the implications of change.
After all, it was HSBC’s Stuart Kirk who said that the investment community didn’t need to worry about climate change as its implications fell outside the six-year window through which he viewed investments. The world must act today to avoid the worst impact of climate change in 2050 and for many, that is too distant to trump concern about inflation, or the Russia/Ukraine conflict, monkeypox, or the latest crisis to dominate the news.
To drive effective action at multiple scales, every actor within the system must be convinced of the importance of action. One way in which this can be achieved is by making people understand how they themselves will be affected – and in the short rather than the medium or long term. One of the ways economists can help with this is to identify the impacts of climate change on a more granular level.
In their 2021 paper Economic Impact of Climate Change, a team led by Dr. Claìudia Custoìdio at Imperial College London assessed the economic impact of climate change, by exploiting variation in local temperature across suppliers of the same client.
It found that suppliers experiencing a 1°C increase in average daily temperature decrease their sales by 2% – in a world that has already gained a 1°C average temperature increase and is on course for 2°C, this should be a concern for all stakeholders.
Connecting rising temperatures with falling sales
The core factors behind the negative impact are productivity, ease of alternate purchase or geography, and lack of adaptability. This is of particular concern for those businesses that don’t have the cash flow to adapt, such as for changing infrastructure.
What the research showed was a correlation between high heat and reduced productivity – for example when it’s too hot, employees can be more absent or working conditions can become more difficult. This is particularly difficult in heat-sensitive industries like manufacturing and processing.
How to slow climate-change impacting business productivity?
The research suggests that available cash flow can make a difference.
As Dr. Custoìdio puts it, “deep coffers might allow larger companies to relocate or divert resources to different branches, whereas cash-strapped businesses don’t have the wiggle room to adapt.”
Climate-change challenges to business
The challenge of adaptation is one that every part of the economy is going to need to address, and it’s one that is going to be affected by inflation and, more widely, by the cost of living crisis.
The last concern is that, for most products, the buyer can easily switch where they make a purchase. While this is more of an issue in larger markets such as the US, where if temperatures are rising in one part of the country, you can source the same goods from elsewhere.
There is a similar potential within Europe, buying from different parts of the bloc. Dr. Custoìdio points out that the more distant a supplier, the more transactional the supplier-client relationship, and the more easily the client finds a substitute than if there’s a personal or local connection.