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“Climate collapse has begun.” Here is the reaction on September 6, 2023, of Antonio Guterres, the Secretary General of the United Nations, after the announcement of the world record for heat this summer on the same day. The summer of 2023 (June, July, August) was, in fact, the hottest ever recorded on Earth, with a global average of 16.77 degrees. According to scientists at the European Copernicus Observatory, these 3 months were even the hottest in about 120,000 years, the beginning of human history.
Temperature records and extreme climate events that are multiplying and intensifying. Heat waves, floods, droughts, summer was punctuated by these extreme phenomena such as torrential rains in Greece and Turkey, fires in the Hawaiian archipelago (at least 115 deaths) and in Canada where 16 million hectares of forests were ravaged, which is the size of Tunisia.
Extreme climate events whose costs are obviously human but also economic. In a study published in August 2023, the insurance company Allianz estimates that heatwaves cost 0.6% of global GDP between May 1 and August 4 alone. China even saw 1.6% of its GDP evaporate due to heatwaves, 1% for Greece and Spain. And again. These figures only take into account the impact of heat waves on employee productivity and over a period of only 3 months.
As a result, French and other companies are and will be increasingly exposed to climate risks. All the studies conducted in recent years on the subject confirm this: business leaders are making these climate risks a major challenge in the short and medium term in their company's strategy.
What are the main climate risks?
For a company, there are three main types of climate risks that we will then detail:
- Physical risks: these are risks related to the direct impacts of climate change
- Transition risks: these are the risks for businesses linked to the transition to a low-carbon economy
- Liability risks: legal proceedings against businesses and associated financial losses
1. Physical risks
These are the best known risks because they are the most visible, those that impact us all as citizens: climate extremes such as those that have followed one another in recent years for example.
These extreme climate phenomena are already being observed all over the world. Their frequency and intensity will increase with each additional tenth of warming. Here is an overview carried out by Météo France of some of these impacts according to the various global warming scenarios.
Here, we will focus on 3 types of impacts of global warming and their consequences on business activity.
a. Rising temperatures and heatwaves
The global average temperature has already increased by 1.2 degrees since the pre-industrial era. 1.2 degrees globally according to the IPCC but already 1.7 degrees in France.
With 14.5 degrees, 2022 was the hottest year recorded in metropolitan France since records began in 1900. This is 2.7°C more than the 1961-1990 average. We are talking about an increase in the average temperature. This is also taking the form of very marked climatic extremes, starting with the summer of 2023, the 4th hottest summer ever recorded in France according to Météo France.
Nothing surprising in reality. Climate models are very clear about the increase in the frequency and intensity of extreme heat waves. Thus, according to IPCC scientists, an extreme temperature event that occurred once every 10 years in a climate without human influence will probably occur 5.6 times with 2°C of warming and 9.4 times, that is to say almost every year, with a global warming of 4 degrees.
What are the consequences for business activity?
The first is the impact of heat on the health of workers and on productivity.
Worse health at work
In a study published in June 2023, France Strategies lists the consequences of heat stress on health and working conditions: reduced alertness and concentration, increased reaction times, changes in mood... The National Institute for Research and Safety thus considers that the occupational risks associated with heat appear as early as 28°C for work requiring physical activity and as early as 30°C for a sedentary activity. High temperatures can be associated with even greater consequences: dehydration, heat stroke...
In Italy, during the heatwave of last July, 5 workers would have died as a result of extreme temperatures. For 4 of them, they were already suffering from heart problems. Italian unions threatened to strike and called for leave to be granted as temperatures were too high to work. In September, at least 4 grape pickers died in Champagne while working in hot weather.
Decrease in worker productivity
Impacts on health but also on productivity. In this study published in 2022, several researchers estimated that exposure to heat is associated with more than 650 billion hours of work lost worldwide, equivalent to 148 million full-time jobs. At issue is therefore the productivity of workers in the face of heat: it would fall by 50% on average from 33-34°C according to the International Labour Organization (ILO).
In France, economic losses linked to heat could reach 1.5% of GDP by the middle of this century. According to the France Strategies study, between 14 and 36% of workers would be exposed to heat. For many, they work in building trades, agricultural and industrial trades.
Businesses are therefore not spared from these episodes of extreme heat: in a study published in 2022, the firm Goodwill Management (Sami's partner firm in supporting companies in their climate strategy) has crossed the forecast maps for the number of abnormally hot days with the geographical distribution of French VSEs/SMEs. As a result, in 2050, just over 5 million VSEs and SMEs should be exposed to more than 50 anormally hot days per year, 6 times more companies concerned than in the period 1976-2005.
A deregulation of agricultural production
Another major impact of heat on economic activity: the disruption of crop cycles. Milder winters cause buds to break early, which can then be affected by an episode of spring frost. This is what happened from 4 to 8 April 2021 in France, causing considerable damage in orchards, vineyards or cereal crops, with sometimes 80 or 90% of production destroyed on some farms. The FNSEA estimated the damage at 2 billion euros. According to the High Council for Climate in its 2022 report, the lengthening of the growing season due to global warming has increased the probability of a frost episode affecting the buds by 50%.
In Another study, AXA Climate assessed the impacts of climate change on 16 fruit crops in 25 departments in France. As a result, in 2030, 45% of the areas studied will be considered to be at extreme or high risk due to heat waves and frost, compared to 22% today.
b. Droughts
Again, the climate models are very clear: droughts are now much more numerous than they were during the 20th century and they will increase in the coming decades.
According to Météo France and the IPCC, a drought that until now occurred one year out of 10 will occur 3 times more often with 2 degrees of warming and every other year with 4°C of warming. Soil drying (agricultural drought) will intensify with up to 25 more days of dry soil per year in 2050. Periods of meteorological droughts (rainfall deficit) will also extend, particularly around the Mediterranean and in the western part of the country, with 5 to 10 additional days by the end of the century.
What are the consequences for business activity?
Agriculture, the sector most affected
The first impact concerns the agricultural sector. In 2003, the exceptional heatwave that affected France and, more generally, Europe was accompanied by an exceptional drought. Result, according to this study, across Europe, crop production fell by 30% in 2003 compared to 2002.
Last year, in 2022, the hottest year ever recorded in France and marked by a 30% rainfall deficit, cereal harvests fell sharply: -10.5%. Maize production, for example, was the lowest since 1990.
Other sectors impacted
But the impact of droughts does not stop at the agricultural sector. Hydrological droughts correspond to low levels of groundwater or reservoirs and to a deficit in river flows. In the latter case, associated economic activities suffer: nuclear power plants that use water to cool reactors, river tourism, river freight or even hydroelectric production.
In 2018, the chemical giant BASF had to stop the activity of one of its factories in Germany, which no longer received enough raw materials, as river traffic on the Rhine was slowed down due to the very low flow on the river. Last year, traffic was again significantly slowed down due to the summer drought. The Gambsheim locks, near Strasbourg, saw traffic fall by 14% in total over the year compared to 2021.
c. Floods
... Linked to an extreme rain event
In this first case, again, torrential rains will become more frequent and more intense under the effect of climate change, thus increasing the frequency of flash floods and therefore the risk of floods. Thus, at +4°C, the occurrence of rainy extremes per decade will be multiplied by nearly 3 and by nearly 2 with 2 degrees of warming. According to the french climatologist Robert Vautard, a specialist in extreme climate events and co-chair of Group 1 of the IPCC, extreme rains will increase everywhere in the country. The indicator of torrential rains in the South-East also shows an increase in their intensity since 1961. Below, the graph represents the daily accumulation of precipitation expressed as a percentage compared to the 1961-1990 average. Higher values are shown in green, lower values in ochre.
... Linked to marine submersion (rising water levels, receding coastline, etc.)
In this second case, according to the 2022 annual report of the High Council for Climate, “the risks of flooding by marine submersion are clearly increased due to rising sea levels due to climate change.” In France, sea level is expected to rise by around twenty centimeters by 2050 and between 40 and 70cm by the end of the century. A rise in sea levels that will be increasingly coupled with the increase in more frequent and more intense extreme weather events such as storms. As a result, marine submersions will also increase. As early as 2030, French coastal cities could experience between 20 and 30 submersion phenomena per year according to some specialists.
What are the consequences for business activity?
The Ministry of Ecological Transition estimates that nearly 1 million and a half inhabitants and more than 850,000 jobs are exposed to marine submersions. Many coastal economic activities are under threat: tourism (campsites, hotels, restaurants, etc.), port activities (leisure or commercial) but also petrochemical industries with the risk of accidents that goes with it.
The human costs of these disasters are obviously very heavy: 53 people died in France during the passage of storm Xynthia in 2010, including 29 in the only town of Faute-sur-Mer in Vendée affected by marine submersion in the middle of the night. The financial cost was estimated at around 2.5 billion euros. The IPCC now estimates that coastal damage linked to rising sea levels will increase by 10 times in Europe.
The number of jobs exposed is even greater in terms of the risk of floods linked to river overflows: 9 million. The cost of floods could increase by 81% over the period 2020-2050, reaching the amount of 50 billion euros, according to the French Insurance Federation.
2. Transition risks
Transition risks are the impacts (positive and negative) associated with the establishment of a low-carbon economy.
“Because our economies are going to decarbonize, companies that have carbon assets, that depend on carbon-based value chains, in fossil fuels for example, will have to decarbonize by force. And that's risky.”
Guillaume Colin, Head of Climate Expertise at Sami
We can distinguish 4 main types of transition risks.
a. Regulatory risks
French and European laws are becoming more and more restrictive on the subject of carbon and, more generally, on environmental impact.
Thus, we can cite:
- The planned increase in the carbon price. Several explanations. First, the Carbon Border Adjustment Mechanism (CBAM) came into force on October 1, 2023. After a learning phase, suppliers from outside the European Union in highly polluting sectors (cement, aluminum, fertilizers, etc.) will be taxed according to the carbon intensity of their exports to the European market. They will also have to buy emission allowances on the European market. At the same time, new sectors will integrate this European carbon market, the free pollution rights distributed until now to European manufacturers will be gradually abolished and emissions quotas will be reduced, with a 63% reduction scheduled for 2030. The price per ton of carbon could reach 250 euros in 2030.
- the strengthening of reporting obligations. The new European directive on extra-financial reporting, The CSRD, will come into force on January 1, 2024. It requires more comprehensive and transparent reporting on the environmental and social impacts of businesses. On climate change in particular, companies will have to carry out a complete carbon assessment (scopes 1, 2 and 3) as well as present their emission reduction and adaptation plan. All companies with more than 250 employees should be affected, i.e. nearly 50,000 companies in Europe.
- Regulations in certain economic sectors that are tightening. Again, we can cite the ban on the sale of new thermal cars from 2035 or the tertiary decree in the building sector.
- In addition, a growing number of companies are asking their suppliers to produce at least the carbon footprint of their activity. The carbon footprint is becoming a criterion in more and more public or private tenders.
b. Market risks
They refer to the financial risks associated with the company's exposure and the consequences of the transition on the various players present on the business market.
As we have just seen, the carbon price will inexorably increase in the coming years and decades, which will increase the cost of raw materials and the most carbon-intensive activities.
“With rising carbon prices, business exposure to carbon financial risk is increasing. And if its value chain is carbon intensive, it risks paying much more for its raw materials or being less competitive downstream because these carbon taxes will hurt margins.”
Guillaume Colin
Another risk is that related to stakeholders. Indeed, consumers are increasingly attentive to their consumption habits and to the environmental footprint of the products they buy. In this study on responsible consumption published in 2021 by ObsoCo, the Society and Consumption Observatory, 61% of French people considered the environmental situation very worrying, to the point of calling for radical changes in order to produce and consume less but better.
c. Technological risks
With the accelerating low-carbon transition, many innovations are emerging and are gradually replacing more emissive products or services. This obviously puts a company at risk of falling behind schedule and losing market shares. This technological risk is also a financial risk, of investment in the research and development of less emissive technologies. Expensive and sometimes unsuccessful investments.
D. Employer brand risks
According to this study published by Unedic in 2023, 84% of French working people want a job in line with the climate challenge and a quarter of working people plan to change their profession or company to put their professional life in line with their ecological concerns. More and more graduates of Grandes Écoles are thus refusing to work for companies whose actions are considered harmful to the climate.
3. Liability risks
This corresponds to the financial impacts associated with possible legal proceedings for a company accused of having participated in climate change or of not having implemented a realistic strategy to reduce emissions.
These legal actions against businesses are increasing. According to the Grantham Institute for Climate Change and Environmental Research, 26 lawsuits against companies were registered in 2022, 27 in 2021, compared to only 9 in 2020 and 6 in 2019. For example, three NGOs sued BNP Paribas in February 2023, denouncing the French banking group's support for fossil fuels. In September 2023, 4 associations filed a criminal complaint against the oil group TotalEnergies for “abstention from fighting a disaster” and “involuntary manslaughter”.
Legal actions that represent a real financial risk for the companies that are targeted. This has been proved by the Grantham Institute from the London School of Economics in a study published in 2023. Filing a complaint results in an average reduction of 0.57% in the value of the company in question. And an unfavorable judgment an average drop of 1.5% of the share price.
How to act for companies?
1. Identify the climate risks that weigh on your business
We have just seen it: the impacts of climate change can have very diverse consequences and at all levels of the company's value chain.
Another element: climate risks in France are obviously not the only ones to be taken into account. A climate event on the other side of the world can also have an impact on the value chain of any French company. Two examples:
- The floods in Thailand in 2011 shut down many factories of international car manufacturers; the manufacture of hard drives or electronic chips was interrupted.
- In 2021, Taiwan experienced its worst drought in 56 years, leading the government to restrict access to water for many manufacturers including TSMC, the world's largest semiconductor manufacturer. He had to reduce water consumption by 10%.
Conducting an analysis of the impacts of climate change means making it possible to precisely identify the risks to which the company may be exposed, what are the major risks that weigh on them, at what levels of the value chain in order to then develop a plan with possible actions to reduce these risks, adapt the company's activity or model, but also to identify and seize the opportunities resulting from this analysis.
Several methods have been developed to identify the impacts of climate change on business activity. In this report, ADEME lists three main methods :
- Risk assessment
- Vulnerability assessment
- Threshold analysis
Here we will detail the vulnerability assessment method, created by the IPCC to identify the risks of climate change on economic sectors.
To determine the risk, it is based on the calculation of a:
- Exposure: what climate hazard is the company exposed to in terms of the location of my value chain?
- Vulnerability: how sensitive is my business to the hazards to which the company is exposed?
Here is an example of a risk analysis using vulnerability assessment:
And an example of the impacts of climate change on a company's value chain, here is Kering:
Many tools and methods, including sectoral ones, are available to businesses to help them carry out this climate risk analysis. Ademe lists some of them in the report mentioned above. Sami's Consulting division teams are also in a position to provide you with such analysis.
As far as transition risks are concerned, i.e. the financial risks associated with the transition to a low-carbon economy, the best risk analysis is the carbon footprint.
“Exposure to this risk is how carbon intensive the company is, how carbon intensive the product or service is being sold is in a carbon market. The risk is linked to carbon dependence. The more dependent the company is, the more it will be exposed to regulations, for example carbon taxes. And to calculate this dependence, the carbon balance is a valuable tool. It is a way of measuring these risks and limiting them.”
Guillaume Colin
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Once a vulnerability diagnosis has been made, the company can move on to the next step.
2. Engaging a mitigation and adaptation plan
Two priorities for the company in the face of climate change:
- mitigation: limiting greenhouse gas emissions
- adaptation: adapting to the impacts of climate change in order to reduce risks and costs
For a company, engaging in a strategy to reduce greenhouse gas emissions is essential. By limiting its emissions, it reduces its dependence on carbon and therefore limits the risks of transition to a low-carbon economy, as well as the risks of liability. Moreover, reducing emissions also means doing your part in the global fight against global warming. The best method to limit the impacts of climate change is to reduce emissions as quickly as possible. Every ton of CO2 avoided counts.
But that won't be enough. Whatever the scenarios for greenhouse gas emissions in the coming years, the inertia of climate change means that the impacts of climate change will increase at least in the coming years and decades. This makes adaptation a major challenge in business strategies.
Once the diagnosis has been made, the challenge for companies is to build an action plan based on the main risks identified. The range of measures to be taken is very broad and obviously depends on each company, its size, its sector, its location and therefore the risks that will have been identified. But here are some possible actions:
- identification of new suppliers to make up for a lack of supply
- new raw materials in the event of major risks to the production of some of these materials (agricultural in particular)
- identification of alternative logistical routes
- adaptation of buildings to physical climate risks: adjustments in the face of floods, insulation in the face of heat waves
- movement/relocation of certain vessels according to their geographical location and associated risks (marine submersion for those located on the coast for example)
- adapt your activity in times of crisis: staggered hours, teleworking...
- change the core of the company's activity
Several methods exist to determine an adaptation plan and implement it: scenario planning, robust decision-making or even trajectory planning. You will find the details of these different methodologies with concrete cases of companies that are pioneers in their adaptation planning in this Ademe report: Businesses, how to make decisions to adapt to climate change?
Ademe has also published two other reports on the climate risks that affect businesses, their identification and adaptation:
Other sources:
- ONERC, National Observatory on the Effects of Global Warming
- Climate Change Adaptation Resource Center
- Institute for Climate Economics
- Work in the face of climate change, France Stratégie
- Climate change 2021: The physical science basis, IPCC
- Going beyond the observations, implementing the solutions, High Council for Climate, 2022
- Climate risks for VSEs/SMEs, Goodwill Management
- Drias, the future of climate
- France weather
- Grantham Institute
- Task Force on Climate-related Financial Disclosures, TCFD
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