An Ideas-Based Online Magazine of the Global Network for Advanced Management

The Challenge of Climate Change: Vulnerability in Europe

Climate change presents enormous challenges for the world, and for organizations that are accustomed to doing business in an environment on the verge of radical transformation. The United States' decision to withdraw from the Paris Agreement has added a new complication. Global Network Perspectives asked experts across the Global Network for Advanced Management about impact of climate change—and the U.S. withdrawal—in their regions.

What are the long-term risks—both for business and the environment—in your region from climate change?

Firstly, climate change produces risks to the ecosystem. A recently published report by the European Environment Agency suggests that all European regions are vulnerable to climate change, although impacts vary by region. Some regions may experience positive effects, for instance as a result of improved conditions for agriculture. However, the majority of regions will be negatively impacted. 

Southern and southeastern Europe is the most exposed area. That region may experience adverse impacts including increases in heat extremes, decreases in precipitation and river flows, droughts, lower crop yields, forest fires, and loss of biodiversity. Coastal zones in Western Europe are exposed to floods and possible storms. Marine ecosystems are vulnerable to increased ocean temperature, increased acidification levels, and the spread of oxygen-depleted dead zones. Arctic ecosystems are not immune either: they are exposed to the melting of land and sea ice produced to higher air and sea temperatures.

Business risks are a direct consequence of the above changes to the ecosystem. They are both industry-specific and general. For instance, in mountain regions, lower precipitations and decreases in river flows may cause a reduction in the hydropower potential or a decrease in ski tourism. Companies in the real estate sector—and indirectly in the insurance sector—are exposed to climate risk owing to the long-term nature of their investments.

Companies are exposed to climate risk even more generally, both directly and indirectly. Even though climate liability and carbon pricing affect primarily firms in carbon intensive sectors (e.g. energy, primary metals, or power generation), they have potential repercussions on a firm’s entire value chain, as companies subject to direct impacts may pass these costs down their supply chain. Floods and storms may disrupt suppliers, displace manufacturing, and even reduce consumption levels. Similarly, the increased cost of maintaining road infrastructure in regions exposed to rock falls and landslides may cause an increase in the cost of logistics.

Finally, businesses are exposed to climate risk even in a more general manner, because the future cost of capital for borrowers will depend on how exposed they are climate risks and on the risk mitigation strategies they can put in place. It is not surprising that EU regulation now requires pension funds to consider environmental risks in their investment strategies.

How much are employees and consumers holding companies accountable for their business's stance on climate-related issues?

We observe an increasing awareness of climate-related issues among both consumers and employees. At consumer level, this phenomenon is probably more visible in advanced economies. This is because, as average education increases with rising income, environmental awareness and the concern for life quality and reduced life expectancy grow accordingly. In turn, larger parts of the population demand greater environmental quality because of its effects on quality of life and wellbeing.  

A similar and perhaps more clear trend can be observed at the level of employees. At HEC Paris we are in a privileged position to observe this phenomenon. When our graduates evaluate offers from potential employers, the environmental, social, and societal performance of these companies are among the criteria that most influence their choices. Needless to say, climate liability is a big part of the equation.

As a consequence, our participants are eager to acquire the theoretical toolkit and instruments to be able to evaluate a company’s stance on climate-related issues. For that reason, in most of our programs we developed dedicated courses or sessions that deal with the climate challenge or—more broadly—with the nexus between economic development and environmental protection and social development.

What impact, if any, could the United States leaving the Paris Agreement have on your country or region?

Cllmate change is by definition a global phenomenon. As a result, one country’s decision to pull out from the Paris Agreement will have an impact on the efforts that other countries must produce to fight against climate change. That is, the decision of the current U.S. administration to leave the Paris agreement will put even more pressure on other large and carbon-intensive economies to curb greenhouse gas emissions. It may, thus, reinforce the role of Europe as a leader in our climate stabilization efforts. Such a role includes a direct contribution (e.g. through an even more pronounced decarbonisation of our economy) but also an indirect one. EU countries were among the first economies to implement dedicated policies to support renewables on a large scale, often successfully, sometimes less successfully. We can now capitalize on this experience and the associated learning to help our partners design better and more effective policies.

HEC Paris France