Continuing our series on global warming, this article delves into the profound impacts of shifting climate conditions on businesses. Directly or indirectly, all businesses experience the impact of global warming. However, the severity of this impact depends on 3 variables – the sector, location and vulnerability level. These variables constitute the three parts of this article, each of which begins with an exploration of how the variable exposes businesses to the impacts of global warming and concludes with possible adaptability approaches in the form of recommendations for the survival of business entities.
Sector
As discussed in the first article of this series, the agricultural sector faces the most direct threat due to the exposure of vital resources in the sector and the environment itself to extreme weather conditions, causing indirect damage to businesses that derive raw materials from the sector. This includes textile businesses, milling businesses, and food processing businesses among others. A quick example is the fish farming, processing and distribution business. The fast-increasing ocean temperature is predicted to cause the extinction of roughly 60% of the world’s fish species as fishes migrate from tropical seas toward cooler waters. This fish migration led to a 60,000 metric tonnes (MT) decrease in fish production between 2017 and 2020, resulting in an overall decline in the growth of the Nigerian fish industry from 3.33% in 2019 to 0.26% in 2020. The declining fish population has also inflated the cost price of fish, thereby reducing demand from consumers and sales by business owners. According to Adeolu Onifade, a small-scale catfish farmer around the Agbado/Ijaiye area of Lagos, “People are not buying like before because of the high price. They would rather go for imported fish which are relatively cheaper”. Research shows that the impact of this sales decline appears to be more evident in women, as female-led businesses account for 59% of businesses in the fishing industry in Africa. (World Bank) The difficulties encountered by these business owners result in an inability to provide for their loved ones, the risk of business closures and vast unemployment.
Furthermore, businesses become more vulnerable to global warming when the human capital, infrastructure or raw materials that they depend on for production, distribution and sales are exposed to frequent natural disasters and climate extremes. Hence, businesses in the conventional energy, transport, construction, heavy industry and manufacturing sectors are faced with immediate threats from global warming. For transport businesses, the damage caused by extreme heat, intense precipitation and flooding, and sea-rise levels among others destroys roads, railways, ports and airways, which could result in quick wear and tear of business assets, increase in the cost of transportation, and risk of life. According to research, annual losses from vehicle maintenance, due to bad roads, are valued at over N133.8 billion in Nigeria and turbulence accounts for 37.6% of all accidents on large commercial airlines from 2009 through 2018. In addition to this, extreme weather conditions cause difficulties in lifting operations and work at height for construction businesses, endanger the lives of construction workers – leading to demand for increased compensation claims, increase the risk of building collapse, declining health and significant loss of value.
Location
The impact of global warming and climate change on the African continent is well documented. It is evident in the fast-increasing temperature, intense drought, extreme precipitation and flooding among other weather extremes that are gradually becoming the norm. Figure 1 shows Africa’s temperature anomalies over the past 4 decades.
Figure 1: Africa’s temperature anomalies (1910 – 2020)
This high susceptibility undoubtedly makes increases climate-related risks for businesses in the region. It, therefore, imposes on investors and business owners in the region to assess and prioritise Environmental, Social, and Governance (ESG) factors in decision-making.
Businesses in rural communities are most vulnerable. While intense precipitation and flooding make it difficult for them to transport their products to urban areas or transport new products for sale within their communities, extreme heat coupled with meagre or no access to power supply hinder them from storing the products; leading to extreme waste and significant business loss. Businesses that migrate to urban areas, face new challenges such as supply chain disruption, urban congestion and a high rate of unemployment in the cities. However, technology and innovation have targeted some of these challenges with the invention of solar cold rooms to reduce waste, autonomous vehicles to reduce the cost and time demands of transportation, and more.
Vulnerability
The susceptibility of a business to global warming can also depend on the materials that were used to build the business facilities, the type or source of raw materials for production, financial limitations, value chain disruption, or a business model. For example, the report shows that the price of maize crop; a raw material used in producing cereals, starch, sweetener, beverage, glue, and industrial alcohol among others grew by 300% in Malawi after Cyclone Freddy storm; revealing how climate extremes can cause the scarcity of raw materials and increase the cost price of raw materials for businesses. In addition, Munich Re insurance company received claims worth more than $350 million from the 2010-2011 Australian floods, which contributed to a 38% quarterly profit decline; exposing how a business model, specifically a customer base, can make a business vulnerable to global warming. Also, more than 160 companies in Thailand’s textile industry were harmed by the 2011 floods. This stopped about a quarter of the country’s garment production, exhibiting how poor risk management strategies contribute to factors that make a business vulnerable to global warming.
Furthermore, the situation could be more devastating for startup businesses. Startups are often characterized by their lean structure and funding limitations, which limit their capacity to implement elaborate risk management and low-carbon transition strategies. The low carbon transition risk is a fundamental basis for evaluating the financial implications, hence the vulnerability of global warming on startup entities. These risks involve the costs of changes in policy and regulations (like a carbon tax) for startups. It can also emerge from changes in technology, markets, and consumer trends, which can lead to reputational risks as consumers’ perspectives shift. For example, a PwC survey found that 76% of consumers will end their relationship with a company that treats the environment, their employees, or the community they operate poorly.
The adaptability approach for businesses within this category is the creation or review of their business models to include strong global warming risk management strategies for the protection of the company. These risk management strategies could include alternative means of generating raw materials, low carbon transition strategies, and enhancement of business facilities to become climate risk resilient, among others.
As the world advances towards actualizing the net-zero goal, it is imperative for business entities to innovate and embrace adaptability practices that will cushion the effects of global warming on their enterprises. Proactively prioritising ESG factors in risk assessment provides an advantage in resilience and sustainability.
About the Author(s)
Olayide Oyeleke is an associate at The AR Initiative; where Dr Emma Etim is the Head of Research.
