The Rising Cost of Climate Change: A Good Time to Ditch ESG?

Monday 22nd July 2024 was the hottest day on record, according to the EU Copernicus Climate Change Service. In the year leading up to it there were 59 days that also exceeded the previous record set in 2016. Scientists have called this “truly uncharted territory” and predicted that “we are bound to see new records being broken in future months and years”.

2024 was also the first year in which average global temperatures clearly exceeded 1.5°C above pre-industrial levels, the threshold set by the Paris Agreement to avoid the most severe impacts of climate change.

Around the world, extreme weather events have decimated communities and destroyed habitats. And the trend only seems to worsen.

Last year in the US alone, 27 major weather and climate disaster events including storms, wildfires, droughts, and heatwaves cost the economy $182.7 billion. More than 568 people died.

Since the National Centers for Environmental Information (NCEI) records began in 1980, such events have cost the US $2.915 trillion. And that’s considered a conservative estimate since events costing less than $1 billion – of which there were many – have not been factored in.

The rising frequency and cost of climate disaster events in the US since 1980

Against this grim backdrop, Trump plans to expand fossil fuel exploitation, pull out of the Paris Climate Accord, and end what he calls the Democrats’ “green scam” including reversing wind subsidies and pollution limits, and reinstating oil drilling in Alaska’s Arctic National Wildlife Refuge. This is despite the positive effects Biden’s Inflation Reduction Act has already had including the creation of hundreds of thousand jobs, significantly reduced costs for healthcare and energy, not to mention the enormous boost it has provided to the clean energy and manufacturing sector.

Meanwhile the LA fires continue to burn, leaving thousands homeless and causing environmental damage on a vast scale. And so, we ask, is this really the time to scrap environmental protections and delay the energy transition?

The latest research suggests that climate-related extreme weather events over the past 20 years have cost the global economy around $2.8 trillion, which breaks down to $16.3 million per hour. Over that period, the study found that climate change could be linked to 60,951 human deaths, which is considered a massive underestimate.  Another recent study by the World Economic Forum (WEF) found that the continuing rise of global temperatures will contribute to global instability and by 2100 could reduce global cumulative GDP by 16% to 22%.

Costs associated with climate impacts can be both direct e.g. from damage to infrastructure and buildings, or indirect, e.g. loss of revenue due to businesses being cut off from their supply chain, increased insurance costs, unemployment linked to damage to the built environment, or negative impacts on workforce health and productivity (mental and physical health issues, displacement of communities, absenteeism, and so on). Calculating these indirect costs is notoriously difficult but any community or business affected by an extreme weather event will attest to the very real costs to their lives and livelihoods.

Estimates also suggest the cost of climate inaction far exceeds the costs associated with investment in renewable energy, upgrading infrastructure, and ultimate shift towards lower carbon, more resilient ways of living.

Public opinion is also now strongly in favour of climate action. According to the Peoples’ Climate Vote 2024, the world’s largest public opinion survey on climate change, 80% want their country to do more on climate change, and 72% want their country to move away from fossil fuels to clean energy quickly.

And yet politically motivated decisions like the one currently plaguing American Airlines for its (very tenuous) link to ESG are increasing. And companies and financial institutions are being banned from considering risks that pose a real and potentially significant threat to their ability to provide the returns they have promised to beneficiaries.

ESG is not without its faults and incidents of greenwashing in which firms have exaggerated their sustainability credential and misled customers as well as confusion over ESG ratings have certainly contributed to damaging the movement’s reputation. But ESG is about more than labels and ratings; it’s about creating long-term value for stakeholders and protecting downside risk – something we all want.

So where do we go from here?

Well, encouragingly, the US Climate Alliance announced the publication of a letter to UN Climate Change Executive Secretary Simon Stiell, indicating that they plan to remain committed to the U.S.’ Paris Agreement goals, despite President Trump’s announced withdrawal from the international climate accord. The US Climate Alliance is a bipartisan coalition of 24 governors securing America’s net-zero future by advancing state-led, high-impact climate action.

Our clients are also navigating the challenge of meeting the preferences of a deeply polarised set of LPs. We expect 2025 will likely see the end of the use of “ESG”, which has become increasingly politicised, but we do not expect to see the end of the practice of integrating ESG, or sustainability factors – as we see continued if not stronger support for integrating sustainability factors across investment portfolios from the vast majority of institutional investors.

If you’d like to discuss these issues, or would like to know more about how Danesmead ESG can help your organisation navigate the current political climate get in touch.

Photo credit: @lovesquish