Impacts and vulnerabilities

Firms face two main types of climate-related risks: direct physical risks and transition risks that arise from society’s response to climate change.

Physical risks are easier to observe and for firms to understand as they emerge from exposure to acute events or chronic transformation. Climate change can have significant impacts on supply chains, distribution, and sales in a number of ways. Climate change is leading to more frequent and severe extreme weather events, such as floods and droughts. These events can disrupt transportation and logistics networks, causing delays and damage to goods in transit. This can result in shortages or excess inventories, affecting sales and revenue.

Changes in temperature can affect the availability and quality of certain products. For example, crops may be impacted by changes in temperature and rainfall patterns, leading to lower yields and lower quality. This can disrupt supply chains and lead to higher prices for consumers.

Climate change mitigation efforts, such as carbon pricing and renewable energy mandates, can increase the cost of energy and other inputs. This can increase the cost of production, transportation, and distribution, which can reduce profits or result in higher prices for consumers.

Heat negatively affects human health and can lead to poorer work performance (reduced productivity) or lower number hours committed to work (labour supply), especially in highly exposed sectors such as agriculture, forestry, mining and quarrying, or construction. Productivity suffers from workers needing to slow down their pace of work and to take additional breaks to rehydrate and cool down.

The EIBIS (2020) asked firms if physical risks had impacted their business. Within the European Union, countries in the south are likely to report higher physical risks to firms’ operations than other regions. This is followed by firms in Central and Eastern Europe, reporting a higher vulnerability to physical climate risks than firms in Western and Northern Europe. This relatively higher perception of physical risk, particularly in Southern Europe, may be due to the rising threat of drought, limiting food production and potentially disrupting tourism in the area. In addition, firms with operations that are more vulnerable to extreme weather events — such as the infrastructure sectors, including electricity, utilities, transport, construction and services (most likely hospitality) — are also more likely to perceive higher physical risks.

Transition risks are less evident, as they depend on global decarbonisation commitments. As awareness of climate change grows, consumer preferences are shifting towards more sustainable products and practices (e.g. increase in local products demands). This can impact sales and demand for certain products, as consumers may choose to purchase products from companies that prioritize sustainability and reduce their carbon footprint.

Policy framework

The policy framework for climate adaptation for businesses and industries in the EU is primarily established through the EU Adaptation Strategy. The strategy sets out a framework for action and identifies a range of measures to be taken at both EU and national levels.

In particular, the EU Adaptation Strategy highlights the need for businesses and industries to adapt to climate change in order to ensure their long-term viability and resilience. It acknowledges that businesses and industries will be affected by climate change impacts..

In addition, the EU has adopted several regulations and directives that require businesses and industries to take climate adaptation measures. For example, the EU Non-Financial Reporting Directive requires certain large companies to report on their environmental and social performance, including their climate change risks and opportunities.

The EU Taxonomy is a classification system, establishing a list of environmentally sustainable economic activities, including climate change adaptation. It could play an important role helping the EU scale up sustainable investment and implement the European Green Deal. The EU Taxonomy will provide companies, investors and policymakers with appropriate definitions for which economic activities can be considered environmentally sustainable, including criteria economic activities have to fulfil to significantly contribute to climate change adaptation. In this way, it should create security for investors, protect private investors from greenwashing, help companies to become more climate-friendly, mitigate market fragmentation and help shift investments where they are most needed.

For the specific issue of the financial sector please go here.

Improving the knowledge base

The CERES project, which stands for "Climate Change and European Aquatic Resources," is a research project that aims to improve the understanding of the impact of climate change on European fisheries and aquaculture, and to develop adaptation strategies for these industries. The project includes case studies in different regions of Europe, and it is focused on improving the resilience of the fisheries and aquaculture industries to climate change impacts.

Further the Climate Resilience Dialogue aims to narrow this Climate Protection Gap – the gulf between how much is lost and how much is insured - and to find ways to stimulate investment in good adaptation. The primary task of the Climate Resilience Dialogue is to exchange views on how to address the losses incurred from climate-related disasters and to identify how the insurance industry can contribute more to climate adaptation, from actions that increase the penetration of climate risk insurance for industry and all of society, to making the conditions right for more investment in good adaptation solutions.

Supporting investment and funding

The European Commission, together with the European Investment Bank, launched the Investment Plan for Europe. The aim of the plan is to mobilize public and private investment in order to boost economic growth and job creation in the European Union (EU). One part of this plan is the European Fund for Strategic Investments.

The European Fund for Strategic Investments (EFSI), the European Investment Advisory Hub and the European Investment Project Portal were created to mobilise investment across Europe. The EFSI should support projects in accordance with the Union's energy, climate and efficiency targets laid down in the Europe 2020 strategy and in the 2030 Framework for climate and energy policies, which aim to meet the objectives of the Europe 2020 strategy for smart, sustainable and inclusive growth. The EFSI aims at supporting strategic investments in key areas, such as infrastructure, energy efficiency, renewable energy, research and innovation, and increasing access to financing for entities with up to 3000 employees, with a particular focus on small and medium-size d enterprises (SMEs) and small mid-cap companies.

The ‘Climate and Infrastructure Fund’ is a new business line within the European Investment Fund (EIF). The EIF is an EU institution established in 1994 to support SMEs by providing them with access to finance. The EIF's main objective is to promote Europe's economic growth and competitiveness by supporting the development and growth of SMEs, which are seen as the engine of the European economy. To achieve this, the EIF provides a range of financial products and services, including guarantees, equity investments, and other forms of risk-sharing financing. The EIF facility is currently composed of two funding sources with a total investment capacity of EUR 400-600 million annually until 2027. Further funding sources are likely to follow in the near future. The EIF’s Climate and Infrastructure Fund investments have a primary focus on climate action and environmental sustainability.

Supporting the implementation of adaptation

• COSME, the programme for the competitiveness of enterprises and small and medium sized enterprises.
• The EU climate services, which deliver services that benefit millions of people and businesses.
• The Oasis Hub is an independent, global aggregator for catastrophe, extreme weather, climate change and environmental risk data, tools & services, as well as providing services in data set enhancement, data aggregation and commercialisation. It aims to create an open and transparent data platform that helps provide environmental, climate change, catastrophe and risk information to industry and the public sector.

The EU also offers businesses a number of support services via the Enterprise Europe Network on resilience, to empower SMEs building up business resilience to future challenges like climate change, and Erasmus for Young Entrepreneurs.