2024: The Hottest Year on Record
The year 2025 began with a stark warning: according to NASA and Copernicus, 2024 was the hottest year ever recorded, with global average temperatures exceeding pre-industrial levels by 1.5 degrees Celsius for the entire year. This has significant implications for businesses, as the physical impacts of climate change can result in substantial financial costs. However, it appears that despite the importance of these costs, the vast majority of companies are not developing adaptation plans to strengthen their resilience to climate shocks.
Quantifying the Financial Costs of Physical Climate Risks
The goal of transitioning to a low-carbon economy is to shift from a high-emissions scenario to a low-emissions scenario, thereby mitigating the physical impacts of climate change. The National Climate and Development Report in Tunisia, published by the World Bank Group ahead of COP28, revealed that combined adaptation and mitigation measures to address climate change could increase GDP growth to 8.8% by 2030, reduce poverty, and decrease energy-related emissions. In contrast, inaction could lead to GDP losses of up to 3.4% by 2030, resulting in annual losses of approximately 6.5 billion dinars. Unfortunately, we do not find estimates of costs at the company level. While some companies have done so, they are the exception. If we consider the case of S&P Global 1200 companies, by 2050, the risks are equivalent to 74% of the total revenue of these 1,200 companies, which are among the world's top companies, or 31% of the total market capitalization of the companies in the index in 2024. By the 2050s, 58% of these costs are expected to be attributed to extreme heat, 21% to water stress, 11% to drought, and 4% to flooding. Will our companies be less exposed?
The Most Exposed Sectors
The sectors most exposed to climate risks in the 2050s are public services, energy, financial services, and communication services. The list includes extreme heat, water stress, and drought, which are the main risk factors. In short, this is what awaits us according to the various scenarios for Tunisia. The location of a company's assets determines its exposure to physical climate risks, resulting in variability in the sensitivity of sectors to climate hazards. For example, water-intensive activities are likely to be more sensitive to water supply constraints and/or increased water costs. Similarly, episodes of extreme heat reduce labor productivity more when work is done outdoors, such as in agriculture, due to heat stress and its impact on human health, than when activities take place indoors, such as in the services sector.
Blind Spots in Adaptation Planning
Investments in adaptation will need to increase to address the growing costs of climate-related hazards. Here, it is clear that companies' progress in adaptation is uneven. Globally, data collected by S&P in 2024 shows that about one in three companies (35%), across all sectors, reported having a plan to adapt to the physical effects of climate change. The assessment of corporate sustainability asks companies if they have a context-specific adaptation plan, which describes how the company will adapt to risks based on location, vulnerabilities, and other characteristic attributes of its activities. A context-specific plan includes measures, both physical and non-physical, to reduce, as far as possible, all material risks that have been identified. The public services and real estate sectors have the highest rates of adaptation planning, at 58% and 50%, respectively. These two activities are heavily dependent on physical infrastructure, which is increasingly at risk of being damaged and disrupted by storms, floods, and other climate risks, in the absence of adaptation.
Looking to the Future
This gap between increasingly frequent and severe physical climate risks and the slow progress made by many companies in adaptation planning represents a growing risk to the global economy. The "Global Risks Report 2025" by the World Economic Forum ranked extreme weather events as the most important global risk over the next decade, followed by other environmental risks such as biodiversity loss and ecosystem collapse, critical changes to land systems, and shortages of natural resources. Investments in adaptation will need to increase to address the growing costs of physical climate risks such as extreme heat, flooding, and drought. Adaptation planning is becoming an essential tool to help companies prepare for the effects of extreme weather events on their activities and the economy as a whole.
