With 30 chapters, well over 2,500 pages, and more acronyms than a self-help library, it’s unlikely that Working Group II’s (WGII) contribution to the Intergovernmental Panel on Climate Change’s (IPCC) Fifth Assessment Report (AR5) is going to be top of most CEO’s reading lists. It makes the most recent winner of the Booker Prize look succinct, which is no mean feat.
This is unfortunate, because embedded in the acronyms, percentage points and academic guardedness, lies a red flag that businesses urgently need to heed – especially global businesses, like those that dominate our stock exchanges and pension funds; like those that dictate our economic well-being.
Growing, growing, gone?
Leaked copies of the draft report highlight what has until now been a largely neglected aspect of climate change: its threat to growth. The authors state baldly that “climate change impacts will slow down economic growth” and that it will “create new poverty pockets in upper-middle- to high-income countries in which inequality is increasing”.
Pulling the various strands of data together, the report is warning that the future middle classes – on whom growth strategies depend – will not exist if climate change is left unmanaged. This is due to its knock-on effects on discretionary income, or purchasing power, which will be felt even where direct impacts (floods, droughts, extreme weather events and the like) are not.
Across the world, food and water are the two most critical components of basic living expenses. As such expenses rise, so discretionary income shrinks.
WG II draft projections for food prices are ominous: a combination of reduced crop yields in many regions, competition for scarce resources, disrupted supply chains and damaged infrastructure do not bode well. While in some areas the immediate effects of temperature increases may be positive, the authors are highly confident that such benefits will be “outweighed by the magnitude and severity of negative impacts”.
The prospects for water prices are equally concerning. The draft discloses high agreement that “climate change is projected to reduce raw water quality and pose risks to drinking water quality”, while disruptions to water supply as a result of droughts and infrastructure damage are likely to increase competition for resources. The draft report’s considered assessment is that “each degree of warming is projected to decrease renewable water resources by at least 20% for an additional 7% of the global population”. These are the kind of disruptions that threaten to send prices rocketing.
In exposing the threat to not only the existing poor and marginalised, but also to the ranks of the existing middle classes, the draft report is calling into question the prosperity of the very people earmarked as the future consumers of the products and services that businesses deliver. Any business that depends on spending from discretionary income – which includes sectors as diverse as fast-moving consumer goods and fashion, technology and transport – will need to re-assess the foundations of its consumer base. Moreover, as the draft report makes clear, climate change is already making itself felt: this risk is immediate and very real.
The urgent case for collaboration
To date, many of the businesses that have responded to warnings of climate change have been motivated by perceived opportunities in the low carbon economy; or from a sense of corporate responsibility (which has not always been easy to justify to shareholders); or, increasingly, because of an appreciation of the operational risks it entails and/or the risks posed by changes to the regulatory framework.
WG II’s report creates a new context for action. It draws attention to the liabilities posed by climate change to the vast majority of businesses’ value bases. As the cost of basic amenities escalates, it will render non-essential goods and services less affordable and less relevant.
This liability is not a matter that can be managed internally by businesses. Transforming our real-economy to ensure climate stability, requires collaboration among businesses, NGOs, governments and other actors.
CEOs really should get reading. The Technical Summary is only 76 pages. It might be worth it.