Many companies underestimate the risks of climate change

Only around half of DAX 30 companies report on climate-related risks

NiedrigwasserClick to enlarge
Low water in German rivers has already caused bottlenecks in supply chains
Source: Andreas Gruhl / Fotolia

The consequences of climate change pose economic risks for companies. A recent study by the German Environment Agency (UBA) shows that only about half of the DAX 30 companies report publicly on these risks. None of the 100 largest companies studied provides information on whether the corporate strategy is resilient to stronger climate change and compatible with an ambitious climate protection policy. UBA President Dirk Messner said, "Climate change is having an ever greater impact on our economy. We have witnessed this over the past few years, and as climate change progresses, these risks will become greater. I am therefore surprised that many companies apparently do not sufficiently address the financial risks of climate change for their business and take a hard look at climate impacts in the long term. Climate management belongs in every company structure as a building block of sustainability management and the continued development of business models."

The DAX 30 companies surveyed see extreme weather events, changed precipitation patterns and increased average temperatures as the main causes of the physical risks of climate change. They expect these risks to translate into declines in production, rising raw material costs and building damage and estimate the potential damage from the physical consequences of climate change to be worth a total of several billion euros over the next two to four decades. At the same time, these companies do not expect the relevant physical risks to increase significantly in the medium to long term. In contrast to the companies' assessments, research by the German Environment Agency shows that the damage caused by climate change will increase sharply in the coming decades.

Companies should also take into account that global supply chains of raw materials and intermediate products as well as domestic goods traffic via waterways may be more strongly affected by climate change in the future. Six percent (55 billion euros) of German imports and four percent (just under 50 billion euros) of exports are distributed among twelve countries or regions that are considered particularly vulnerable to climate change (see also "The transnational impacts of global climate change for Germany"). Back in the summers of 2018 and 2019, low water levels caused by persistent drought led to delivery bottlenecks and production stoppages for companies that are heavily dependent on shipping-based delivery. Companies should therefore address climate-related risks and take appropriate precautions – in this example, through adapted shipbuilding or a modal shift to rail.

Among the risks that may be critical to business development from the company's point of view, physical risks due to the actual consequences of climate change are reported much less than risks resulting from an effective climate protection policy. "In fact, though, climate change is having an ever greater impact on the economy. In Germany, shipping traffic came to a standstill because the rivers did not carry enough water due to drought. Abroad, for instance, floods in Asia disrupted supply chains and brought local production to a standstill," said Dirk Messner.

In order to effectively take climate-related risks into account in the financial markets, the state should oblige companies to report accordingly. With this information, investors and banks can better identify and manage climate-related risks in their portfolios. "Information on the sustainability of companies in the face of climate change is central for investors and customers. Companies should therefore be more obliged to report comprehensively and publicly on climate-related risks. This creates more transparency and comparability and sets the course for more investment in climate-resilient and climate-friendly technologies. Mark Carney, former president of the British central bank and a pioneer in this field, has been pointing out these facts for years," says Messner.

Among others, an international network of central banks and financial supervisors as well as the Sustainable Finance Advisory Board of the German government are also calling for climate-related reporting in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). TCFD consists of experts from the financial and real economy and was established by the Financial Stability Board of the G20 to support financial market actors in the early identification of climate-related risks. It is likely that climate-related risks will also be a stronger component of the amendment to the European Corporate Social Responsibility Directive (CSR Directive), which has required large, capital market-oriented companies to make a non-financial statement on material sustainability risks since 2018.

UBA has developed a proposal for a uniform framework of requirements for corporate climate management in the study on climate management in companies. Another ongoing project is concerned with the evaluation and further development of CSR reporting.

Further information

The report on climate-related risks for businesses is part of the Economics of Climate Change: New Management Instruments to Reduce Climate Risks for the Public and Private Sector research project which runs until 2022. The project was commissioned by UBA jointly to the Frankfurt School of Finance and Management, the Munich Climate Insurance Initiative and akzente kommunikation und Beratung GmbH.

The study is based on all current sustainability reports and non-financial statements of the 100 largest German companies. The CSR Directive requires the latter mainly of large capital market-oriented companies with a workforce of more than 500 employees. In addition, the reporting of the DAX 30 companies was analysed in the database "Climate Change 2019" by the organisation CDP as well as several sustainability reports of selected medium-sized companies. The results are representative for the reporting of large companies in sustainability reports and non-financial statements. The report also shows which political processes on sustainable finance take climate-related risks into account and derives a uniform structure for climate-related risk management based on guidelines for managing climate risks in companies. This is designed to help companies systematically deal with climate risks.