Climate change has become an increasing global concern. Dependence on fossil fuels and nonrenewable resources has inflated people’s carbon footprint worldwide. Despite greater access to clean energy and awareness of the business case for sustainability, the effects of climate change are worsening. As such, business leaders must understand how to navigate its challenges in an ever-changing landscape.
Here's an overview of the negative impacts of the climate crisis on global businesses.
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One of climate change’s biggest challenges is its large-scale impact. It’s a major obstacle in global business because many countries don’t have the funds or capabilities to invest in environmentally friendly business practices.
“Climate change is affecting our food,” says Katharine Hayhoe, chief scientist for The Nature Conservancy, in Harvard Business School Online’s Business and Climate Change course. “It's estimated, since 1980, that $5 billion on average every year is lost in crop losses due to climate change—much of those in some of the poorest and most vulnerable countries in the world.”
This statistic underscores climate change’s global economic ripple effects, highlighting the urgency for sustainable solutions. Those who want to effect positive environmental change must work harder to compensate for others who can’t.
This struggle around climate change has led to several negative impacts on global business.
1. Emission Instability
Global emissions are the biggest contributing factor to climate change. Rapid response to CO2 emissions can make a substantial difference in climate health.
Emissions are primarily generated by high levels of energy intensity, or the amount of energy required to produce a given output. Higher levels of energy intensity produce higher total emissions.
To calculate total emissions, use the following formula:
Total CO2 Emissions = CO2/Energy x Energy/GDP x GDP/Capita x Population
This formula shows growing concern about the correlation between population growth and CO2 emissions production. As gross domestic product (GDP) per capita and population increase, the economy’s energy intensity for emissions decreases to keep the status quo. To reduce emissions, energy intensity must decrease at a relatively higher rate than population and GDP per capita increase.
As population and GDP per capita increase, emissions also rise. According to the International Energy Agency (IEA), global CO2 emissions rose by six percent in 2021—their highest level in history. This problem has been compounded by individuals with access to common resources, who use them without concern for the negative impacts of their depletion—or what’s known as the tragedy of the commons.
Related: Do you want to dive deeper into the tragedy of the commons? Listen below to HBS Professor Forest Reinhardt's episode of The Parlor Room podcast—or watch it on YouTube.
2. Cross-Border Pollution
Environmental externalities are significant problems for global sustainability. Cross-border pollution is difficult to prevent because air and water pollution can spread from adjacent countries, regardless of intra-national regulations. This externality is hard to resolve since the CO2 molecule’s origin isn't relevant to its effect on climate.
3. Industry-Specific Challenges
While climate change threatens every industry, some are in greater danger than others. For example, skiing companies are threatened by rising global temperatures that significantly hinder snowfall. In the Colorado Rockies, a popular skiing destination, the temperature has risen three degrees Fahrenheit since 1980, reducing the location’s skiing season by almost a month.
In the agriculture sector, the reality of these challenges is already evident.
“Climate change is definitely real and something that we're already experiencing within our berry-producing regions,” says Driscoll's Director of Sustainability Tannis Thorlakson in Business and Climate Change. “Berries are very delicate fruit. We like to say they like to grow where people like to live. Not too warm, but sunny days, cool nights.”
Wine, energy, and commercial fishing are additional industries that could experience climate change’s most severe impacts. As a result, companies operating in those fields must proactively mitigate risk.
4. Rising Insurance Costs
Another industry impacted by climate change is insurance. Unlike other fields, insurance affects global consumers more than companies.
As the risk of extreme weather events increases, premiums for flood and storm protection will likely rise to mitigate insurance companies’ risk. This could result in higher insurance costs for many firms and negatively impact their bottom lines.
5. Psychological Stress
In addition to climate change’s tangible business impacts, it's also a mental health concern. The American Psychological Association reports that weather events associated with climate change, like flooding and prolonged droughts, have been increasingly associated with cases of depression, anxiety, and post-traumatic stress disorders.
Businesses can take a major hit when employees struggle with mental health. Since high stress levels directly correlate with decreased productivity, businesses across the globe could experience declines in efficiency.
6. Exacerbation of Poverty
While climate change doesn’t specifically target impoverished countries, it can have a lasting effect. The populations least equipped to deal with climate change are typically those impacted the most.
Potential risks include:
- Reduced access to clean water
- Physical risks due to extreme heat
- Danger from rising sea levels
- Local businesses closing, such as fisheries and farms
- Stagnated economic growth
Climate change and severe weather patterns are likely to exacerbate impoverished countries’ and communities’ existing vulnerabilities, in turn, increasing several health and economic risks.
7. Diminished Supplies
Climate change’s environmental impacts are likely to result in diminished availability of food and water. While this can significantly impact impoverished countries, it's also likely to result in higher costs for consumers and businesses.
Furthermore, a lack of resources may cause countries to become increasingly protective over natural resources, making it harder for companies to obtain the raw materials needed to produce goods.
The Impact of Globalization on the Environment
Globalization provides many benefits for businesses but can be dangerous for the environment if executed improperly. As climate change negatively impacts global business, increased globalization contributes to climate change. Business leaders considering expanding their businesses internationally should be aware of the damaging effects doing so could have.
Here are three impacts increased globalization has had on the environment:
- Goods transport: Transportation of goods from one country to another could result in habitat destruction, increased emissions, and the introduction of invasive species into new countries.
- Overspecialization: Globalization allows countries to obtain resources from other nations, providing them the freedom to capitalize on their economic strengths. While it's important for countries to focus on those assets, overspecialization can result in problems like deforestation, overfishing, and increased pollution.
- Increased awareness: One positive side effect of globalization is increased awareness of climate change. As countries experience a prevalence of decreased biodiversity and invasive species, some have responded with more laws and regulations to address those problems.
To avoid the cycle of globalization and climate change, business leaders should take proactive steps to reduce the environmental risks of expanding internationally.
Related: 6 Pros and Cons of Globalization in Business to Consider
Proactively Addressing the Problem
It's easy to assume climate change won't have much impact until the distant future, but the world is already experiencing its effects.
“We’re already starting to have to pay some of the adaptation costs that, until recently, we assumed were far in the future,” says HBS Professor Forest Reinhardt in the online course Global Business, “as storm intensity increases, as fire intensity seems to increase, and as sea level rise begins to occur.”
The good news is that steps are being taken to address climate change’s potential impacts. Governments are implementing environmentally friendly regulations, while consumers and investors are demanding that businesses focus on sustainability.
Companies are also recognizing the benefits of sustainability on their bottom lines, investing in renewable energy and environmentally friendly packaging, and embracing responsible land-use management. These firms are creating positive ripple effects across their industries as competitors follow suit.
Related: Check out our video on the triple bottom line below, and subscribe to our YouTube channel for more explainer content!
For example, New Belgium Brewing has made significant progress in reducing its environmental impact. In Business and Climate Change, Katie Wallace, New Belgium Brewing’s chief environmental, social, and governance (ESG) officer, shares how they’ve reduced the company's emissions through vital actions like installing solar panels, creating electricity from wastewater, and capturing and reusing heat in their brewing process.
In addition, the company’s advocacy for sustainable energy solutions is evident.
"We did advocate for 100 percent renewable electricity here in the Colorado grid, and they’re making progress toward that,” says Wallace in Business and Climate Change. “Projects are being financed and installed.”
This initiative not only supports New Belgium Brewing's operational sustainability but inspires broader community benefits.
These measures highlight how companies are investing in and actively implementing renewable energy technologies to mitigate their environmental impact.
The Importance of Studying Climate Change in Global Business
Business leaders who want to expand their firms internationally should ensure they thoroughly understand the environmental factors associated with global business. They should account for climate change concerns and confirm their operations don’t compound problems. The impact of climate change on business is profound and requires both proactive mitigation efforts and comprehensive adaptation strategies.
Taking online courses, such as Global Business and Business and Climate Change, is an effective way to obtain the knowledge and skills required to prepare for globalization’s environmental, economic, and political ramifications.
Want to learn more about the environmental impact of international business and how organizations can adapt to and mitigate climate change? Explore our online business in society courses, including Global Business and Business and Climate Change. Not sure which course is the right fit? Download our free flowchart.
This post was updated on May 31, 2024. It was originally published on August 2, 2022.
