Last week, the Intergovernmental Panel on Climate Change (IPCC) – a collection of the world's leading scientists – released its latest report on the impacts and vulnerabilities of our planet to its rapidly changing climate. The IPCC is an international scientific body that was established in 1988 to provide the world with regular scientific assessments on the impacts of climate change and what the global community can do to combat them.
Last week's report was the second piece in a three-part series that will make up the IPCC's Fifth Assessment Report, which builds upon the Fourth Assessment Report that was published in 2007. The first piece focused on the physical science basis for climate change and was published last September in Sweden. Part three of the assessment will focus on the steps world leaders can take to combat climate change and is scheduled to be released later this year.
Why this report matters and the companies and industries that could be most affected
This latest UN report highlighted the significant consequences that all people face if the global community does not dramatically come together to cut the greenhouse gas emissions that are causing the planet to warm and destabilize. In fact, the report notes that we are already feeling the impacts of a warming planet, ranging from more frequent and severe storms to impacts on marine species and migration patterns.
The IPCC's Fifth Assessment Report is another reminder from the world's leading scientists to global policymakers of the dire consequences of inaction on climate change. It should also serve as a renewed warning to the global private sector, as climate change threatens our fundamental way of life and our most basic systems.
As systemic foundations of society are affected by climate change, so is the commerce that these systems support. If global health declines, health care costs for businesses rise and productivity falls. If ever-increasing storms damage population centers, the cost of risk capital increases and insurance systems are challenged to offer affordable rates. If poverty expands, future markets and trading partners are lost and the need for emergency aid increases.
While the impacts of climate change will be felt unevenly across the globe, no nation or industry is immune from its reach.
Here are three key findings from the report and a few of the companies and industries that could be most affected:
1. Potential expansion of global poverty
The report stated with medium confidence that throughout the 21st century, climate change impacts will slow down economic growth, make poverty reduction more difficult, prolong existing poverty, and create new poverty traps. It added that across urban and rural areas, wage-labor-dependent households that are net buyers of food are expected to be particularly affected due to increases in food prices.
Who this could affect most:
Many companies have turned their focus to emerging markets for new growth opportunities, but few have made the investments and had the success of PepsiCo (NASDAQ:PEP) and The Coca-Cola Company (NYSE:KO). From firsthand experience in emerging markets, I can tell you that these brands are well represented, even in the tiniest villages and most remote towns.
This growth strategy is clearly paying off as PepsiCo saw revenues increase by 10% in emerging markets last year, while tripling their sales in these markets over the last five years. In an impressive statistic, Coca-Cola products are sold in every country on the planet – except in North Korea and Cuba.
However, it is emerging markets that continue to drive growth for the Atlanta-based multinational. Last year, Coca-Cola saw concentrate sales increase by 5% in Africa and by 7% in Eurasia -- while they remained flat in North America from the previous year.
Due to their investments and substantial presence in emerging markets, both of these companies stand to be disproportionately affected by the global economic impacts of climate change. Risks for prolonged and expanded poverty in key markets such as Latin America, Africa, and India could reduce disposable income for product consumers, as well as cause instabilities to global supply chains and distribution networks. This is not the future that these companies would like to see in these promising growth markets.
2. Risks to highly populated coastal cities
The report stated with very high confidence that climate change was increasing risks in urban areas for disasters such as extreme precipitation, inland and coastal flooding, landslides, air pollution, drought, and water scarcity. In addition, the report added with very high confidence that due to the sea level rise projected throughout the 21st century and beyond, coastal low-lying areas will increasingly experience adverse impacts such as submergence, coastal flooding, and coastal erosion.
Who this could affect most:
In October of 2012, we witnessed the tragic human and capital costs of severe flooding in two of America's major coastal cities when Superstorm Sandy ravaged New Jersey and parts of New York. While there were many economic losses, from commercial fishing to tourism, the region's utilities were hit especially hard – resulting in fundamental changes to their business models (and criticisms of mismanagement).
For example, the Long Island Power Authority (LIPA) had as many as 82% of its customers without power following the storm and some remained in the dark for weeks. In response to the widespread blackouts, the LIPA was privatized by the governor of New York to be run by another of the state's large utilities Public Service Enterprise Group (PSEG) – which itself suffered from over $300 million in damages from the storm.
In addition to damages, as more frequent and severe natural disasters are predicted to affect America's major population (and power) centers, it appears that utilities will have to absorb substantial infrastructure improvement costs. In the case of Con Edison (NYSE:ED) in New York, the utility attempted to finance infrastructure enhancements by passing along rate hikes to customers, only to be blasted by the governor and to have the plan denied by the state's Public Service Commission.
3. More frequent and more severe natural disasters
An overarching reason for concern in the report was the systemic risks due to extreme weather events, leading to a breakdown of infrastructure networks and critical services such as electricity, water supply, health and emergency services. The report also added with a very high degree of confidence that impacts from recent climate-related extremes such as droughts, floods, and wildfires reveals significant exposure of many human systems to climate variability.
Who this could affect most:
The severe droughts that have recently plagued western and southern states have given us a glimpse into how the impacts of climate change can cause systemic social and economic challenges. 2013 was the driest year in California ever recorded, and the forecasts for increased precipitation this year are not much better. This historic drought has forced the nation's leading state for agricultural production to implement vast water restrictions, resulting in unharvested farms, scarce food for cattle, and negative economic impacts reverberating across the economy. In all, California's vast farming industry could experience nearly $5 billion in lost revenue from this year's drought.
While key agricultural sectors are suffering losses, the impacts from these droughts will be felt nationwide with higher food prices at local stores and supermarkets. For example, California grows more than 80% of America's celery and broccoli. Due to extreme water shortages, the cost of both of these vegetables could rise by as much as 10% this year.
The silver lining: Businesses can help shape our future
The consequences of climate change are dire, but the silver lining is that we can do something about it.
We know that the global community still has time to come together and act aggressively to combat climate change, and that businesses large and small can play a critical role in this fight. Industry leaders like Google (NASDAQ:GOOG) are making catalytic investments in our green energy future by supporting efforts such as the Ivanpah project, the largest solar thermal power tower system in the world that will provide clean energy for 140,000 homes in California.
Innovative green energy companies like SolarCity (NASDAQ:SCTY) are allowing us to use our homes and businesses to capture the power of the sun at greater levels than in any other time in our history. Companies across the nation are reducing their carbon footprint with efforts such as Apple's (NASDAQ:AAPL) initiative to power all of its facilities through renewable energy, an ambitious goal that the company is already three-quarters of the way to achieving.
We know that climate change is a global problem that will take global cooperation and collaboration to solve, just as we know the clear and present danger that faces our planet, and economies, if we choose not to act. In the words of President John F. Kennedy, "There are costs and risks to a program of action, but they are far less than the long-range risks and costs of comfortable inaction."
Jeffrey Pelletier has no position in any stocks mentioned. The Motley Fool recommends Apple, Coca-Cola, Google (C shares), PepsiCo, and SolarCity. The Motley Fool owns shares of Apple, Coca-Cola, Google (C shares), PepsiCo, and SolarCity and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.