7 Ways Climate Change Affects Global Businesses

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.

7 Ways Climate Change Impacts Global Business

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. Therefore, those that want to effect positive environmental change must work harder to make up for others that 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 around 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.

2. Cross-Border Pollution

Environmental externalities are significant problems for global sustainability. Cross-border pollution is highly difficult to prevent because air and water pollution can spread from adjacent countries, regardless of intra-national regulations. This externality is difficult 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 3 degrees Fahrenheit since 1980, reducing the location’s skiing season by almost a month.

Agriculture, wine, energy, and commercial fishing are also 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 has a larger effect on global consumers 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 levels of stress 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:

1. 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.
2. 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.
3. 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 be proactive about reducing 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 of an 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 Harvard Business School 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.

The Importance of Studying Global Business

Business leaders who want to internationally expand their firms should ensure they thoroughly understand the environmental factors associated with global business. It's important to account for climate change concerns and confirm their operations don’t compound problems.

Taking an online course, such as Global Business, 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? Explore Global Business—one of our online business in society courses—to learn about the macroeconomic, political, environmental, and social considerations of international expansion. Not sure which course is the right fit? Download our free course flowchart.