Climate change will dramatically alter global business and trade

Climate change will increase water scarcity, alter food production and dramatically change energy supply and migration patterns, according to a new report released today by Lloyd’s, the world’s leading specialist insurance market.

Climate change and security: risks and opportunities for business, launched in conjunction with the International Institute for Strategic Studies (IISS), highlights that these changes will bring threats – and opportunities – for businesses.

Lloyd’s Chief Executive, Dr Richard Ward, said:

“Climate change will change the way we live and work, and will lead to greater competition for scarce resources, such as food and water. This is likely to result in increased economic nationalism and greater global insecurity, which will in turn add to the complexity and cost of doing business.

“Every organisation needs to have a clear understanding of its particular vulnerabilities and have in place a range of mitigation strategies. Their ability to understand what the impacts of climate change are going to be could not only protect them from threats but could also open up new business opportunities.”

IISS Director of Transnational Threats and Political Risks, Nigel Inkster, said:

“Climate change has the potential to act as an accelerator of global instability and has been recognised in both the USA and Europe as an issue affecting national security. Climate change could lead to increased competition between states for ever more scare resources and could in the worst case lead to inter-state conflict.

“Doing business in a world increasingly affected by climate change will present challenges and companies will need to be aware of both the general and specific aspects of climate change likely to affect their particular businesses. But climate change also presents major business opportunities. And the business work has a crucial role to play in both developing new low-carbon technologies and changing consumer behaviour to adopt a low-carbon lifestyle.”

The report explores four key areas through case studies, outlining their impacts on business:

Water - The risk of water-induced conflict with particular reference to competition between India and Pakistan over access to the diminishing supply of water from the Indus river basin.

Food - Issues of food security - looking at the problems facing China, a country with a large population and declining water resources and arable land, and the prospect for tension with Russia, a country with an excess of arable land and water and a declining population.

Energy security - looking specifically at the Arctic, an area rich in oil and gas resources which are becoming increasingly exploitable as the ice-cap melts, and which could be the subject of competing claims by five nations.

Migration - with a particular focus on the problems potentially faced by the USA in the event that climate change drives populations in Mexico to migrate northwards.

While awareness of the threats and opportunities is a key factor, businesses also have an important role to play in encouraging debate and greater understanding of the problem.

“The private sector needs to support research on climate change, and develop and promote new technologies both to mitigate and adapt to climate change. Just as important is encouraging informed public debate, such as our 360 Risk Insight project,” Dr Ward said.

Notes to editors

Four key cases:

Water

Risk
Because of global warming, rainfall patterns are expected to change drastically. In some places there will be more rain, however it will not always fall in the same places which rely upon it and if it does, it may come in torrential and hugely destructive downpours. Almost all conflicts over water that might lead to war are related to large rivers that flow through several countries.

Case study
In India before 1947, the Indus river system provided water to the largest continuous tract of irrigated land in the world. Over 80% of the farmers who used that water lived in what became Pakistan after Partition in 1947 and for the next two decades, the two states quarrelled incessantly over the divisions of the waters. That ended with the signature of the Indus Water Treaty of 1960 which allocated the bulk of the flow to Pakistan. India was to receive all the water from the three eastern rivers and a fixed volume from two others. Climate change will bring the Indus Water Treaty into question, as the glaciers that feed all six branches of the river, could be gone is as little as twenty or thirty years. This would make the entire Indus system seasonal with low rivers when agriculture needs them most. For Pakistan this is a matter of life and death, and when it is no longer receiving enough water under the treaty provision to sustain its own population, it is likely Islamabad will challenge the old agreement. The potential for serious conflict over the Indus waters is high.

Implications for business
A large swathe of countries around the equator will fall victim to water stress. In some extreme cases this would result in inter and intra-state tensions and even conflict. Water is essential for many manufacturing and production processes and access to water will increasingly be seen as a potential strategic weapon, impacting upon businesses that operate in these nations. Water stress may also render parts of the planet uninhabitable, and not just in the developing world.

Food

Risk
Climate change may generate serious problems for global food supply, manifesting first as sharp price increases and subsequently as absolute scarcities. The world’s population has tripled in the past 60 years, but it is all being fed from essentially the same land as before. In the 1970s, when population growth threatened to outrun food production, the ‘Green Revolution’ averted it and food production grew faster than population for another three decades. However, the key elements in the Green Revolution have largely exhausted their potential. The impact of global warming on food production will be largely negative and anxiety about the future availability and price of food is already causing a rapid growth in bilateral deals. Britain is in an unusually vulnerable position, with just over half its food imported from abroad.

Case study
China officials are concerned about global warming. A major concern is the Yangtze River that provides much of the water for southern China, which has its source in glaciers on the edge of the Tibetan plateau and are losing mass at an average of 7% a year. Combined with hotter and drier conditions, the reduced volume of water will probably make agriculture in southern China considerably less productive than it is now. A final blow to the Chinese food supply is likely to be the bigger storms that may progressively inundate its agriculturally rich but low-lying delta lands. Taking all of these phenomena together, it is probable that China will be one of the worst hit countries in terms of its ability to feed its people.

Implications for business
Competition for available food resources will become more intense and international food markets are likely to function in less predictable ways. Companies involved in food production and food processing will need to build higher levels of uncertainty of supply into their planning assumptions and develop sophisticated strategies for dealing with consumer expectations. Companies reliant on food produced overseas will need to consider the reliability of supplies and consider whether food can be produced closer to the point of consumption.

Energy and natural resources

Risk
Barack Obama has said that the new policy of his administration will be ‘to reverse our dependence on foreign oil while building a new energy economy that will create millions of jobs’. Beyond the exchange cost and political risk of depending on ‘foreign oil’, the threat of climate change now provides another strong incentive for shifting to non-petroleum-based energy in the transportation industry as fast as possible.

If the demand for oil were to go into even a modest decline, the impact on the price could be immediate and profound and lead to the marginalisation of the world’s major oil exporters. In the Middle East, governments might struggle to support burgeoning populations without time and financial support to diversify away from dependence on oil revenues. A move away from oil would leave many countries facing an uncertain future.

Case study
There have recently been disagreements over the extent of sovereignty over Arctic waters. The interest in the Arctic is not about shipping routes; it is about oil and gas. A US Geological survey estimates that up to 20% of the world’s known remaining oil and gas reserves are located there. Technically all the countries bordering the Arctic ocean – The USA, Canada, Russia, Norway and Denmark – are committed to abide by the rules of the United Nations Convention on the Law of the Sea (UNCLOS) in determining their seabed boundaries and while the oil and gas may be in areas that clearly belong to a country and are not open to dispute, confrontations in disputed areas are certainly possible.

Implications for business
International oil markets are likely to become tighter and more volatile as increasing demand meets constrained supply, and oil-producing states seek to maximise revenues while the opportunity still exists. Companies whose business depends on high-emission fossil fuels, such as coal, will come under increasing pressure to adopt measures to mitigate the greenhouse effects but there are considerable business opportunities for companies willing to invest in the development of energy-efficient technologies and alternative renewable energy sources.

Demographics

Risk
Climate change is likely to produce destabilising waves of refugees. Population movements brought about by climate change are likely to exacerbate an issue that has been coming to the fore for some time, namely the rise of the megalopolis. Large areas of cities, such as Rio de Janeiro, have become effectively unpoliceable and have fallen under the control of organised criminal groups – a risk that businesses need to be aware of. Faced with the prospect of uncontrolled migration flows, countries in the developed world need to consider funding large-scale adaptive measures which would enable populations to remain where they were. This approach would require societies to reassess their priorities, which would have far-reaching implications for lifestyles and patterns of consumption. The alternative is the imposition of much stricter immigration controls. This could mean in some cases, the erection of physical barriers to prevent unauthorised migration and limitations on international travel. Measures such as this are unlikely to be wholly successful and would give rise to some difficult security and policy dilemmas.

Case study
Out in the desert between Mexico and the United States, only a few strands of wire divide the two countries. Several thousand people cross it from south to north each day and at least half of them either stay in the US permanently or at least until they have made enough money to go home with. The general US population wants the border shut against legal immigrants but Americans strongly believe that immigration is positive for the country as a substantial chunk of American business has come to depend upon cheap labour provided by illegal Mexican and Central American immigrants. However the climate forecast is for severe desiccation right across the sub-tropics and when the farms dry up and blow away, there will be nowhere for the ex-farmers to go but into the ever-spreading barrios around the big Mexican cities, but more likely to the US border. Closing the border would have political ramifications in both nations.

Implications for business
Climate change in the developing world will lead to migratory shifts from the poorer parts of the globe to the wealthier parts as they are more able to deal with it and will suffer less. These migrations may mean a growth in the potential pool of prospective workers in the developed world but also a brain and manpower drain in developing parts of the world as able workers leave for more temperate climates.