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Two Steps Forward

How the climate crisis will crash the economy

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The chickens are coming home to roost.

Even before the western United States became a regional inferno, even before the Midwest U.S. became a summertime flood zone, even before an annual hurricane season so bad that the government is running out of names to attach to them, even before Colorado saw a 100 degrees Fahrenheit heatwave swan dive into a 12-inch snowstorm within 48 hours.

Even before all that, we’d been watching the real-world risks of climate change looming and growing across the United States and around the world. And the costs, financially and otherwise, are quickly becoming untenable.

Lately, a steady march of searing heat, ruinous floods, horrific wildfires, unbreathable air, devastating hurricanes and other climate-related calamities has been traversing our screens and wreaking havoc to national and local budgets. And we’re only at 1C of increased global temperature rise. Just imagine what 2C or 3C or 4C will look like, and how much it will cost.

We may not have to wait terribly long to find out.

It’s natural to follow the people affected by all this: the local residents, usually in poorer neighborhoods, whose homes and livelihoods are being lost; the farmers and ranchers whose crops and livestock are withering and dying; the stranded travelers and the evacuees seeking shelter amid the chaos. And, of course the heroic responders to all these events, not to mention an entire generation of youth who fear their future is being stolen before their eyes, marching in the streets. So many people and stories.

But lately, I’ve been following the money.

The financial climate, it seems, has been as unforgiving as the atmospheric one. Some of it has been masked by the pandemic and ensuing recession, but for those paying attention, the indicators are hiding in plain sight. And what we’re seeing now are merely the opening acts of what could be a long-running global financial drama. The economic impact on companies is, to date, uncertain and likely incalculable.

The financial climate, it seems, has been as unforgiving as the atmospheric one.

Last week, a subcommittee of the U.S. Commodity Futures Trading Commission (CFTC) issued a report addressing climate risks to the U.S. financial system. That it did so is, in itself, remarkable, given the political climes.

But the report didn’t pussyfoot around the issues: "Climate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy," it stated, adding:

Climate change is already impacting or is anticipated to impact nearly every facet of the economy, including infrastructure, agriculture, residential and commercial property, as well as human health and labor productivity. Over time, if significant action is not taken to check rising global average temperatures, climate change impacts could impair the productive capacity of the economy and undermine its ability to generate employment, income and opportunity.

Among the "complex risks for the U.S. financial system," the authors said, are "disorderly price adjustments in various asset classes, with possible spillovers into different parts of the financial system, as well as potential disruption of the proper functioning of financial markets."

In other words: We're heading into uncharted economic territory.

Climate change, said the report’s authors, is expected to affect "multiple sectors, geographies and assets in the United States, sometimes simultaneously and within a relatively short timeframe." Those impacts could "disrupt multiple parts of the financial system simultaneously.” For example: "A sudden revision of market perceptions about climate risk could lead to a disorderly repricing of assets, which could in turn have cascading effects on portfolios and balance sheets and therefore systemic implications for financial stability."

Sub-systemic shocks

And then there are “sub-systemic” shocks, more localized climate-related impacts that "can undermine the financial health of community banks, agricultural banks or local insurance markets, leaving small businesses, farmers and households without access to critical financial services." This, said the authors, is particularly damaging in areas that already are underserved by the financial system, which includes low-to-moderate income communities and historically marginalized communities.

As always, those least able to least afford the impacts may get hit the hardest.

This was hardly the first expression of concern about the potentially devastating economic impacts of climate change on companies, markets, nations and the global economy. For example:

  • Two years ago, the Fourth National Climate Assessment noted that continued warming "is expected to cause substantial net damage to the U.S. economy throughout this century, especially in the absence of increased adaptation efforts." It placed the price tag at up to 10.5 percent of GDP by 2100.
  • Last month, scientists at the Potsdam Institute for Climate Impact Research said that while previous research suggested that a 1C hotter year reduces economic output by about 1 percent, "the new analysis points to output losses of up to three times that much in warm regions."
  • Another report last month, by the Environmental Defense Fund, detailed how the financial impacts of fires, tropical storms, floods, droughts and crop freezes have quadrupled since 1980. "Researchers are only now beginning to anticipate the indirect impacts in the form of lower asset values, weakened future economic growth and uncertainty-induced instability in financial markets," it said.

And if you really want a sleepless night or two, read this story about "The Biblical Flood That Will Drown California," published recently in Mother Jones magazine. Even if you don’t have a home, business or operations in the Golden State, your suppliers and customers likely do, not to mention the provenance of the food on your dinner plate.

Down to business

The CTFC report did not overlook the role of companies in all this. It noted that "disclosure by corporations of information on material, climate-related financial risks is an essential building block to ensure that climate risks are measured and managed effectively," enabling enables financial regulators and market participants to better understand climate change’s impacts on financial markets and institutions.

However, it warned, "The existing disclosure regime has not resulted in disclosures of a scope, breadth and quality to be sufficiently useful to market participants and regulators."

An analysis by the Task Force on Climate-related Financial Disclosure found that large companies are increasingly disclosing some climate-related information, but significant variations remain in the information disclosed by each company, making it difficult for investors and others to fully understand exposure and manage climate risks.

The macroeconomic forecasts, however gloomy, likely seem academic inside boardrooms. And while that may be myopic — after all, the nature of the economy could begin to shift dramatically before the current decade is out, roiling customers and markets — it likely has little to do with profits and productivity over the short time frames within which most companies operate. Nonetheless, companies with a slightly longer view already are considering the viability of their products and services in a warming world.

Consider the recommendations of the aforementioned CFTC report, of which there are 20. Among them:

  • "The United States should establish a price on carbon."
  • "All relevant federal financial regulatory agencies should incorporate climate-related risks into their mandates and develop a strategy for integrating these risks in their work."
  • "Regulators should require listed companies to disclose Scope 1 and 2 emissions. As reliable transition risk metrics and consistent methodologies for Scope 3 emissions are developed, financial regulators should require their disclosure, to the extent they are material."
  • The Financial Stability Oversight Council "should incorporate climate-related financial risks into its existing oversight function, including its annual reports and other reporting to Congress."
  • "Financial supervisors should require bank and nonbank financial firms to address climate-related financial risks through their existing risk management frameworks in a way that is appropriately governed by corporate management."

None of these things is likely to happen until there’s a new legislature and presidential administration in Washington, D.C., but history has shown that many of these can become de facto regulations if enough private-sector and nongovernmental players can adapt and pressure (or incentivize) companies to adopt and hew to the appropriate frameworks.

Finally, there is collaboration among the leading nongovernmental organizations focusing on sustainability reporting and accountability.

And there’s some news on that front: Last week, five NGOs whose frameworks, standards and platforms guide the majority of sustainability and integrated reporting, announced "a shared vision of what is needed for progress towards comprehensive corporate reporting — and the intent to work together to achieve it."

CDP, the Climate Disclosure Standards Board, the Global Reporting Initiative, the International Integrated Reporting Council and the Sustainability Accounting Standards Board have co-published a shared vision of the elements necessary for more comprehensive corporate reporting, and a joint statement of intent to drive towards this goal. They say they will work collaboratively with one another and with the International Organization of Securities Commissions, the International Financial Reporting Standards Foundation, the European Commission and the World Economic Forum’s International Business Council.

Lots of names and acronyms in the above paragraph, but you get the idea: Finally, there is collaboration among the leading nongovernmental organizations focusing on sustainability reporting and accountability. To the extent they manage to harmonize their respective standards and frameworks, and should a future U.S. administration adopt those standards the way previous ones did the Generally Accepted Accounting Principles, we could see a rapid scale-up of corporate reporting on these matters.

Increased reporting won’t by itself mitigate the anticipated macroeconomic challenges, but to the extent it puts climate risks on an equal footing with other corporate risks — along with a meaningful price on carbon that will help companies attach dollar signs to those risks — it will help advance a decarbonized economy.

Slowly — much too slowly — but amid an unstable climate and economy we’ll take whatever progress we can get.

I invite you to follow me on Twitter, subscribe to my Monday morning newsletter, GreenBuzz, and listen to GreenBiz 350, my weekly podcast, co-hosted with Heather Clancy.

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