The effect of climate change on economic growth



Climate change has become a critical environmental narrative of the 21st century. But the issue is now having a real impact in business circles too. Here, Stephanie Hammond, director of accounts, audit and compliance at accountancy firm Beatons, explores why we need to take the financial risk of the crisis very seriously.

Unless you have been living under a rock, you will know just how hot – or not – the issue of climate change is.

But what can be hard to understand is how a significant, long-term shift in weather patterns can impact an individual business.

The fact is climate change has the potential to slow our economic growth in the coming decades with predicted temperature changes reducing incomes globally by roughly 23% by 2100.

Another study has found that a 4.5°C increase in global temperatures could cut the global domestic product by $74 trillion and, hidden within these worldwide economic estimates are the effects on individual companies, who will inevitably suffer from a change in the availability of raw materials and disruption to supply chains. 

This explains why, earlier this month the UK’s accounting watchdog launched a major review into whether companies and their auditors are adequately reflecting the financial dangers of the climate crisis in their accounts.

The Financial Reporting Council, which sets reporting standards for all listed companies in the UK, plans to use the review to make sure companies are being clear with investors about their exposure to climate risks and to ensure that recently increased requirements are being met.

Some UK companies currently have three main climate change reporting responsibilities - a requirement to list the principal risks and uncertainties they face (which recently changed to include climate), a duty under Section 172 of the Companies Act to report the impact of their activities on the environment and, since April last year, a new government requirement to report energy use and carbon emissions.

Financial auditing is instrumental in this because not only does it examine these criteria, it helps companies examine the way climate change could affect the value of their assets.

On top of this, it helps us create a national picture. After all, company reports and accounts are essential to understanding how the corporate world is responding to the challenge of climate change – making us all responsible for our behaviours and helping inform investors on who operates sustainably and where they should allocate their money.

Auditors like myself will be placing more weight to a potentially rapid transition towards a low-carbon future.

Mark Carney, the former Bank of England governor, warned companies late last year to use their next two annual financial reports to road-test how they represent climate risks in their accounts.

On top of this, quite honestly, making the move now demonstrates to your clients, customers, shareholders and stakeholders that you are forward-thinking and future-proofing.