2.1 Climate change poses substantial physical risks to private sector The physical impacts of climate change put companies’ operations, infrastructure and supply chains at risk Headlines about storms, floods, fires, heatwaves and droughts are now routinely followed by reports of their impacts on individual companies’ assets, revenues or costs. For example, consider the following: –Due to a 2022 drought, Sichuan’s hydropower generation dropped to about 20% of its typical capacity, forcing Toyota and Foxconn to halt production at their plants, while supply chain disruptions extended to Tesla and SAIC Motor.23 –Heavy flooding in Germany in 2021 inflicted $1.4 billion in damage to the tracks, bridges, stations and other assets of railway operator Deutsche Bahn.24 –Two years of wildfires in California led to the 2019 bankruptcy filing of PG&E (Pacific Gas & Electric Company), with the utility reporting that it faced $30 billion in liabilities.25 –The historic 2011 floods in Thailand, which displaced millions and saw 800 people perish,26 devastated a key industrial corridor and severely disrupted global supply chains. Toyota estimated its operating profits were reduced by approximately $1.6 billion over the year.27 In addition to these acute events, chronic climate impacts such as water scarcity, rising sea levels and prolonged heatwaves are also becoming more frequent. As warming continues to accelerate, these risks will materially increase Each of these events was a shock at the time, but the conditions that triggered them will become increasingly likely down the line. As global warming drives more frequent and extreme weather conditions, the risk of physical damage to assets and infrastructure rises, along with reduced worker productivity and disruptions to supply chains that are vulnerable to natural hazards. An in-depth analysis of the ways in which physical risks might trigger value chain and societal losses are available in the World Economic Forum’s report Business on the Edge: Building Industry Resilience to Climate Hazards.28 15 The Cost of Inaction: A CEO Guide to Navigating Climate Risk

The Cost of Inaction 2024