Climate, the Bill of Inaction: Companies Risk Up To 25% of Profits

Companies that fail to take action to address climate-related risks could see up to 25% of their corporate profits at risk by 2050, while global GDP could contract by up to 22% by the end of the century, according to a new study by the World Economic Forum, in collaboration with Boston Consulting Group ( BCG ), which finds that climate change is no longer an abstract threat, but an economic emergency that is already eroding profits and financial stability for companies.

“Many companies are aware of climate risks, but struggle to translate them into a concrete strategy. The real danger is thinking that climate is a distant problem, when in reality the economic impact of physical risks from weather events is already evident and, without concrete actions, destined to grow exponentially,” said Lorenzo Fantini, Managing Director and Partner of BCG.

“We can no longer afford to ignore the warning signals: climate adaptation is not a cost, but a necessary investment to safeguard your business. Postponing means paying an exorbitant price when the risk becomes reality.”

The study, entitled The Cost of Inaction: A CEO Guide to Navigating Climate Risk, shows that these are not remote scenarios: from 2000 to today, extreme climate-related events have already caused 3.6 trillion dollars in economic damage – of which 1.0 trillion between 2020 and 2024 alone, more than half due to storms and hurricanes.

These trends are particularly evident in Europe and the United States, where insurers are withdrawing from areas that are vulnerable to climate-related natural disasters and therefore uninsurable, meaning that they lack insurance coverage because the risk is too high.

Businesses at Risk: From Physical Damage to Transition Costs

The BCG and WEF report distinguishes two types of threats for companies. On the one hand, physical risks, linked to extreme events such as hurricanes, fires and droughts, which damage infrastructure, slow down production and interrupt supply chains. On the other, transition risks , which arise from the increase in carbon taxes and the devaluation of assets linked to fossil fuels.

For example, global demand for coal is set to decrease by 90% by 2050, preventing any plant put into operation after 2010 from reaching the end of its life cycle, which is on average 20-25 years. Furthermore, over the next two decades, the most exposed companies will see operating costs soar and the value of fossil assets decline by up to -35% already by 2030, with consequences for several industries.

Despite the growing recognition of climate risks, many companies appear to be underestimating their magnitude. An analysis of financial statements shows that companies report estimated financial impacts of around 1-3%, when in reality, according to BCG scenarios, the real loss could range between 5% and 25% of EBITDA over the coming decades.

The alternative: investing in the transition is worth it

Faced with this scenario, the report highlights how investing in the ecological transition is not only an environmental necessity, but also an economically advantageous choice for companies. Every dollar invested in climate resilience generates an economic return of between 2 and 19 dollars, avoiding future losses.

At the macroeconomic level, investments also pay off in the long term: to keep warming below 2°C, it would be necessary to invest around 2% of global GDP in mitigation and a further 1% in adaptation, which would pay off handsomely as it would avoid losses of between 10% and 15% of global GDP by the end of the century.

Those who are able to seize the opportunity of the climate transition will have an expanding market ahead of them : the value of the green economy will go from the current 5,000 billion dollars to 14,000 billion by 2030. According to the study, growth will be driven by alternative energy (49% of the market), sustainable transport (16%) and eco-friendly consumer products (13%): sectors that are growing at an annual rate of 10%-20%, well above the global growth rate.

The data speaks clearly: standing still in the face of the climate crisis is neither an environmentally nor an economically sustainable option.

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(Featured image by Markus Spiske via Unsplash)

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First published in ESG NEWS. A third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

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