Business needs to cushion itself against the costs of climate change

Sub-Saharan Africa is on the front line of the climate crisis, facing rising temperatures, prolonged droughts, extreme weather events and mounting threats to food security and infrastructure. While contributing less than 4% of global greenhouse gas emissions, the region bears a disproportionately high cost of climate change. Businesses must act to mitigate these effects.

The World Economic Forum’s latest Global Risk Report, in which Marsh McLennan is a strategic partner, has ranked extreme weather events, amplified by climate change, as the world’s most significant long-term risk for the second consecutive year, followed by biodiversity loss and ecosystem collapse, critical change to Earth systems and natural-resource shortages. 

Since the first global risks report in 2006, the impacts of environmental risks worsened in intensity and frequency, costing the global economy more than $2 trillion. All 33 risks in the survey, including misinformation, state-based armed conflict, societal polarisation and geoeconomic confrontation, are expected to worsen in the years leading up to 2035, but environmental risks present the most significant deterioration. 

Africa bears the brunt of this climate change, paying a disproportionately high cost for adapting to rising temperatures, extreme weather events, dwindling water resources and threats to food security and infrastructure. Already, African countries lose about 5% of their GDP due to climate-related impacts, forcing many to allocate an average of 9% of their national budgets to address extreme weather events. 

Even though Africa contributes less than 4% towards global greenhouse gas emissions, its climate change bill is rising: multi-year droughts are ongoing in many parts of the continent, while catastrophic floods caused significant loss of life, displacement and infrastructure damage throughout West and Central Africa, the Horn of Africa, South Africa and Libya. 

According to the World Meteorological Organisation many regions in Africa warmed by at least 1.2°C and might surpass those readings over the coming years. The impact of climate change varies globally, with Sub-Saharan African countries facing higher temperature increases in comparison to the global average — this is at a time when these countries are already experiencing volatile economies.  

Sub-Saharan Africa is severely exposed to climate because of its high dependence on rain-fed agriculture, limited infrastructure and lower capacity to adapt. Coastal regions face rising sea levels and erosion, while arid and semi-arid areas struggle with desertification and water scarcity. 

Agriculture, a cornerstone of the region’s economy, is highly susceptible to climate variability as rising temperatures and erratic rainfall patterns cause poorer crops and increased crop failures, with significant implications for food security, potentially resulting in increased imports and higher food prices.

Without major investment in adaptation and resilience, sub-Saharan Africa will continue to bear the heaviest burden of climate change and economies will be strained. Already, the cost of climate adaptation is projected to range between $30 billion and $50 billion annually over the long term, the equivalent of about 2% to 3% of the region’s GDP, says the World Meteorological Organisation State of the Climate in Africa 2023 report, released in September 2024.

Extreme weather events, such as floods and droughts, can damage critical infrastructure, including transportation networks, water supply systems and energy facilities. For instance, when a severe drought lowered water levels in Lake Kariba, the world’s largest manmade lake, Zambia was hit by a severe energy crisis due to reduced hydroelectric power generation.

Addressing the costs of climate change requires international support. At COP29, held in Baku, Azerbaijan in November 2024, developing countries decried the existing $100 billion aid target as inadequate, calling for a new funding goal to implement adaptation strategies, build resilient infrastructure and safeguard the livelihoods of millions across the region.

Public-private partnerships can play a crucial role in tackling the financial and operational problems. Governments can collaborate with businesses to develop more affordable and comprehensive insurance solutions. Public-private partnerships can also foster investments in climate-resilient infrastructure, data-sharing on weather risks and incentives for businesses to adopt sustainable practices. 

These collaborations help build a more robust, collective response to climate-related risks, ensuring that businesses and communities are better equipped to withstand future extreme weather events.

Despite efforts to curb carbon dioxide emissions, progress has been too slow. As a result, businesses must focus on adapting to the climate reality with a long-term view, making strategic decisions about insurance, where to invest, how to manage assets and how to build long-term financial resilience.

Effectively addressing climate change requires both climate mitigation, which focuses on reducing emissions to limit global warming, and climate adaptation, by enhancing resilience through asset-level and system-level factors. 

At the asset level, businesses need to protect their physical assets, ensure continuity of operations, safeguard personnel and prepare for emergency responses. At a system level, they must  consider broader networks, such as suppliers, customers, critical infrastructure, resources, ecosystem services, governments, regulators, capital providers and communities.

Marsh’s 2024 Corporate Climate Adaptation Survey shows 83% of organisations are assessing future climate risks but 43% aren’t using cost-benefit analysis to build the business case for adaptation.  

Businesses should consider climate risk modelling to predict potential future scenarios and identify areas requiring mitigation. They might need to purchase more specialised insurance products like parametric insurances to address emerging risks and enable organisations to protect against revenue losses resulting from supply-chain disruptions caused by events like natural disasters, weather perils, political instability and cyberattacks.

The insurance sector plays a vital role in mitigating risks, with studies showing that every $1 spent on resilience saves $7 in economic costs. However, businesses often focus more on asset-level considerations like physical infrastructure and emergency response, neglecting broader system-level factors such as critical infrastructure, ecosystem services  and regulatory frameworks. We need a more holistic approach to climate adaptation because storm clouds are on the horizon. 

Spiros Fatouros is the chief executive of Marsh McLennan Africa and South Africa.