Exposure to climate risks varies significantly across sectors Companies with extensive physical assets, complex supply chains and/or operations in high-risk areas are generally more vulnerable. The exact exposure is of course highly individual and not always apparent. Companies with similar business models can be impacted differently, depending on their specific circumstances. But few companies are unexposed given the numerous ways in which climate change can impact corporate operations. The following examples of more strongly impacted sectors show why: –Communication services and utilities. Cell towers, communication lines, data centres and other extensive communication infrastructure can be severely damaged by storms, floods, fires and other extreme weather events, leading to service interruptions and increasing repair costs. The same goes for power plants and transmission lines, which are costly to repair. Prolonged power outages can also expose utilities to fines and significantly reduce their revenue. For example, Australia’s 2020 bushfires caused widespread communication outages and inflicted millions of dollars of damage to the infrastructure of Telstra, the country’s leading telecom player, with 36 cell towers affected.29 –Food and beverages. More frequent extreme weather events and growing water stress would reduce crop yields and increase costs for irrigation and protective measures, particularly in water-intensive sectors. In a CDP (Climate Disclosure Project) report, Nestlé detailed the impact on its operations of exceptional droughts in Brazil’s arabica coffee regions between 2014 and 2016. Reduced coffee production led to price increases of over 50% for arabica and 40% for robusta beans, with an estimated cost to Nestlé of CHF 0.8 billion to 1.0 billion (approximately $925 million to $1.15 billion).30 Companies operating in emerging markets will be more impacted The Asia-Pacific region, home to six of the 10 countries most affected by extreme weather events and disasters,31 along with many emerging economies in Africa, the Middle East and Latin America carry higher-than-average exposure risk to climate impacts, while at the same time struggling to finance the resilience projects needed to protect their societies and economies. Companies that are exposed to these regions – either directly or through their supply chains – would therefore face greater financial impacts. However, these impacts are not limited to emerging economies and certain regions in developed markets will also be exposed to significant losses. On top of physical risks, companies will be impacted by slowing overall GDP growth If unchecked climate change limits the world economy’s ability to grow, this would also be detrimental to the top-line growth of businesses, but is more difficult to adapt to this scenario. Companies at the forefront of climate risk management are building a comprehensive view of their exposure and vulnerability to various hazards across their full value chain. This can lead to surprising discoveries, both in terms of new risks and the scale of existing risks and where they are located (see Case Study 1). A case study from a European highway operator illustrates why future cost risks are so high, even in the short to medium term. The company historically incurred average annual costs of 5% of EBITDA to deal with physical damage to its infrastructure from natural hazards. In a scenario of unchecked climate change, the company expects these costs to roughly double by 2050, even though the frequency of weather events such as extreme precipitation might only increase by 10% to 15% over this period. The reason is that such events will not only become more frequent, they will also become more severe and spread over larger geographical areas. As a result, assets that were previously unexposed now face greater potential risks and high-damage infrastructure events in the future (see Figure 11).CASE STUDY 1 Why are these costs so high? Case study from a European highway operator 17 The Cost of Inaction: A CEO Guide to Navigating Climate Risk

The Cost of Inaction 2024