Business on the Edge 2024

1.4 Climate-driven fixed asset losses pose a growing threat to corporate profitability 1.5 Utilities, travel and telecommunications sectors face the highest potential earnings shocksThe scale and ubiquity of such figures tends to mask the need for individuals and businesses to act. The picture becomes clearer when translating losses down from the aggregate to the scale of an individual company. To assess business viability in different emissions scenarios, the impact of fixed asset losses was set against company profitability. The analysis finds that for the average listed company, climate-driven losses equate to a drop in earnings of 6.6-7.3% per year by 2035, depending on the emissions scenario, accelerating to 8.1- 10.1% by 2045 (see Figure 6). For comparison, the profit margins of S&P 500 companies declined by 20.0% between Q3-2008 and Q2-2009 through the financial crisis. Profit margins dropped 15.3% in the four quarters to Q2-2020, encompassing the depths of the Covid-19 pandemic. However, these are imperfect comparisons. The banks were recapitalized during the financial crisis and corporate profit margins had broadly recovered by Q2-2010. Similarly, S&P 500 profitability rebounded to pre-pandemic levels by Q1-202122 as successful Covid-19 vaccine rollouts ended the cycle of lockdowns and governments spent heavily to support citizens and economies. By contrast, the complexity and scale of Earth system tipping points are of a different order of magnitude. By definition, once you pass a tipping point, there is no going back. The damage done is both binding and growing. No financial stimulus or vaccination programme will quickly solve them. The inference is that the risk to company earnings from climate hazards on fixed assets alone may soon rival a global recession or pandemic – a risk that will hit every year with increasing severity. For the average listed company, climate-driven losses equate to a drop in earnings of 8.1-10.1% per year by 2045. Fixed asset losses per year as a proportion of EBITA under low and high emissions scenarios (2025-2055)FIGURE 6 2025 2035 2045 20554.8% 4.6%7.3%9.9% 6.6%8.1%10.1%12.8% Low emissons scenario High emissons scenario% EBITA Note: Average for 5,043 companies with available data; average EBITA 2021-2023. See methodology at Annex 2 for further detail on 2025 estimate. Sources: S&P Global Sustainable1, Accenture analysis. The threat to profitability from climate hazards is even steeper in some industries. Again, the impact is likely to be highest in utilities (20.7-23.6% under low and high emissions scenarios) and telecommunications (20.3-22.1%), where the scale of fixed asset losses equates to a drop in earnings of more than a fifth over the next decade (see Figure 7). Travel (20.2-21.6%) faces a similar level of risk. Despite having large stocks of fixed assets, on average, energy companies face a more moderate risk (2.9-3.4%) because their average earnings today are among the highest of industries analysed. However, as energy transition risks amplify over time, potential earnings shocks will likely rise.23 Business on the Edge: Building Industry Resilience to Climate Hazards 14