As climate costs mount, businesses consider spending to adapt: report

Work on climate change has largely focused on preventing it from getting worse, but as a new RBC report points out, businesses are also starting to think more about potential spending on adaptation and preparation as the costs of disasters pile up.

The report says extreme weather and natural disaster costs totalled US$368 billion last year, 14% above the long-term average since 2000, and that this year could match or exceed the total.

The trend is expected to worsen, as the report notes there’s projected to be a 2.7-degree rise in average temperatures by 2100 based on current global policies and actions. An optimistic scenario pegs the rise at 1.9 degrees.

The costs stemming from rising temperatures are drawing more attention in boardrooms, with the report noting that mentions of climate change are on the rise in both the U.S. and Asia.

“We are also seeing discussions of extreme weather impacts during earnings calls hit new highs this year,” said Sara Mahaffy, RBC’s head of global sustainability strategy research, in the report.

Mentions of physical climate change risk on Canadian earnings calls saw a steady rise from late 2020 to a peak in mid-2023, but the report showed those mentions had fallen sharply in recent months.

Talk has been most prominent in industries such as utilities, insurance and industrial services — those most affected by climate change, Mahaffy said.

“Companies have not only been citing higher financial impacts (risks), but also increased tailwinds for their products and services that are helping customers prepare and respond to extreme weather events and natural disasters (opportunities).”

The report says it remains a challenge to finance larger, long-term adaptation efforts — including measures such as burying power lines and building floodways — but cited a recent study that found every $1 invested in adaptation and resilience generates more than $10 in benefits over a decade.

Public funding has so far accounted for about two-thirds of adaptation spending, the report notes, with especially significant gaps in developing countries. While annual adaptation needs for lower-income countries total US$387 billion, international public finance flows have averaged only US$28 billion per year.

Part of the importance of investing in developing countries is the opportunity to build for the future, said Mahaffy.

“According to the World Bank, 70% of infrastructure that will exist in developing countries by 2050 has yet to be built, presenting a huge opportunity to integrate adaptative solutions early on.”

In addition to ramped-up spending, companies are also exploring new ways to adapt. These include insurers offering sustainability-linked coverage that rewards resilience measures, and the growth of ESG debt that includes adaptation clauses.

Insurers are also adapting by issuing more catastrophe bonds, which transfer risk to investors. The market for catastrophe bonds has grown 7% annually since 2015 and is on track to exceed US$50 billion this year, the report notes.

While the report highlights many U.S. companies positioned to benefit from shifting trends, it also names several Canadian firms.

Fertilizer giant Nutrien could be well positioned through products that help farmers manage crops. Satellite company MDA Space may see growing demand for weather forecasting and climate modelling. Canadian firms in waste management could see higher demand due to disaster response needs, while engineering and construction firms may benefit from the need to build climate-resilient infrastructure.