Business Risks Posed by Climate Change: From a Japanese Perspective
Have you recently felt that extreme weather events such as heavy rain and intense heat occur more frequently?
In fact, the number of severe weather-related disasters, including floods, storms, droughts, and heat waves, has nearly quintupled over the 50 years between the 1970s and the 2010s. The economic damage caused by these events has expanded approximately eightfold over the same period (WMO, 2021).
One factor related to the occurrence of extreme weather is climate change driven by global warming. As you may know, global warming refers to the rise in the Earth’s average temperature. According to the Intergovernmental Panel on Climate Change (IPCC) Sixth Assessment Report, the Earth’s average temperature by the 2010s (the average from 2011 to 2020) had increased by 1.1°C compared with the 19th century, and global warming is now approaching nearly 1.5°C (IPCCa, 2022). This represents a temperature change that humanity has not experienced in at least the last 2,000 years.
The rise in temperature is due to the massive combustion of fossil fuels (coal, oil, and natural gas) since industrialization in the 20th century, which has rapidly increased the concentration of greenhouse gases, such as carbon dioxide, in the atmosphere. These increased levels of carbon dioxide act like a film around a greenhouse, trapping more of the sun’s heat energy on the Earth’s surface, leading to a rise in temperature.
However, a mere increase of 1.1°C or 1.5°C in temperature may not sound like much to many people.
Nevertheless, even this small increase in average temperature has triggered various changes on Earth, such as altering wind and ocean currents, increasing the amount of water vapor in the atmosphere, raising sea temperatures and levels, and melting ice in the Arctic and Antarctic. These changes interact with one another and have a significant impact on the global climate.
Currently, countries around the world are working toward achieving carbon neutrality by 2050, with the aim of reducing net carbon dioxide emissions to zero. However, even with these efforts, global warming is unlikely to halt. According to the latest predictions compiled by the IPCC, even if carbon neutrality is achieved by 2050, it is highly likely that global warming will exceed 1.5°C by 2040. Moreover, even if the current reduction targets set by various countries are steadily implemented, carbon neutrality by 2050 is unlikely. In fact, the reality suggests that global warming could reach 2°C by around 2050 (IPCC, 2023).
How, then, could this seemingly small rise in global temperatures of 1.5°C or 2°C lead to severe disasters in society? How might this impact business? In this study, we examine the risks on Japanese business posed by climate change-induced weather disasters and social disruptions, focusing on specific issues, such as damage from heavy rainfall and flooding, reduced labor productivity due to heatwaves, and the effects of drought and water shortages on agriculture and related sectors.
1. Damages Caused by Heavy Rainfall and Flooding
(1) Risks for Heavy Rainfall and Flooding
First, global warming increases the risk for heavy rainfall and flooding. This is because, as the temperature increases, the amount of vapor contained in the atmosphere increases (for every 1°C rise in temperature, the saturated water vapor amount increases by approximately 7%), leading to higher volumes of rainfall.
According to the IPCC Sixth Assessment Report, extreme rainfall events that would have occurred once every 10 years without human-induced climate change are predicted to increase by 1.7 times with 2°C of warming (IPCCa, 2022). In Japan, the Japan Meteorological Agency predicts that with 2°C of warming, the frequency of heavy rainfall events with daily precipitation of over 100 millimeters will increase by approximately 1.2 times, and those with over 200 millimeters will increase by approximately 1.5 times compared with the late 20th century average (1980–1999) (Ministry of Education, Culture, Sports, Science and Technology and Japan Meteorological Agency, 2020).
Heavy rainfall and short-term intense rainfall also increase the risk for flooding. This is because rivers may swell rapidly, causing them to overflow their banks (fluvial flooding), or rainwater may accumulate in one area, leading to local flooding (pluvial flooding).
(2) Impact on Business
The specific impacts of heavy rainfall and flooding on businesses vary greatly depending on the industry, business model, location of facilities, and position within the supply chain, making it difficult to generalize.
However, one notable example is the 2011 flooding of the Chao Phraya River basin in Thailand, which had significant repercussions for the Japanese economy. This flood inundated seven industrial estates, including the Rojana Industrial Park in Ayutthaya Province, which is home to many Japanese companies. Consequently, hundreds of Japanese firms, including Toyota, Nissan, Honda, Nikon, TDK, and Toray, were affected.
As such, the impact of the floods was immense. According to World Bank estimates, economic losses in Thailand amounted to approximately ¥3.6 trillion, and the disruption extended beyond Thailand, affecting global supply chains as well (World Bank, 2011). This event was one of the factors contributing to Japan recording its first trade deficit in 31 years since 1980.
Climate change is expected to increase the damage caused by severe floods, abnormal rainfall, and typhoons. Naturally, there is a risk for such weather disasters causing significant damage in Japan. Moreover, given Japan’s strong economic ties with neighboring Asian countries, any major natural disaster in the region could have a ripple effect on the Japanese economy.
2. Labor Productivity Drop Due to Extreme Heat and Heatwaves
(1) Risks for Extreme Heat and Heatwaves
The term “global warming” also evokes risks associated with extremely high temperatures, such as heatwaves and heat-related illnesses. Indeed, as noted earlier, there has been a noticeable increase in the impact of heatwaves worldwide in recent years.
According to the IPCC Sixth Assessment Report, extreme heat events that occurred approximately once every ten years in the late 19th century are now occurring with a frequency that is 2.8 times greater due to a 1°C increase in global temperatures.
As temperatures rise further, these events are projected to occur 4.1 times more frequently with a 1.5°C increase and 5.6 times more frequently with a 2°C increase. Additionally, even extreme heat events that occurred about once every 50 years in the late 19th century are now occurring with a frequency 4.8 times greater because of the current 1°C increase, and this frequency is expected to rise to 8.6 times with a 1.5°C increase and to 13.9 times with a 2°C increase (IPCC, 2022a).
(2) Impact on Business
Because of such extreme heat, heatstroke-related deaths are becoming increasingly common worldwide. In Japan, the summer of 2023 was the hottest since records began in 1898, with 104 people dying from heatstroke between July and September (Japan Meteorological Agency, 2024).
For those in professions that require outdoor work or working indoors without air conditioning, the intensifying heat presents a life-threatening issue. If global warming continues at its current pace, it is predicted that by 2050, global labor productivity could decrease by as much as 20% (Dunne et al., 2013).
For instance, in Japan, more than half of the prefectures and designated cities have already marked days with temperatures above 35°C as non-working days for public works projects. As a result, project timelines have been extended, increasing overall costs.
Moreover, the 2019 amendment to the Construction Business Act prohibits setting excessively short project deadlines without considering non-working days due to extreme heat. This practice is also spreading to private sector projects. As the number of extreme heat days from May to October is expected to increase nationwide, the project timelines are anticipated to lengthen even further.
3. Impact on Agriculture, Hydroelectric Power Generation, and Water Transportation Due to Droughts and Water Shortage
(1) Risks for Droughts and Water Shortage
As global warming progresses, some areas will experience more severe droughts. The mechanism behind this is that, as the temperature rises, the atmosphere can hold more water vapor, leading to heavier localized rainfall. However, this also increases the number of dry and sunny days.
According to the IPCC Sixth Assessment Report, droughts affecting agriculture and ecosystems in arid regions have already increased by 1.7 times compared with the late 19th century because of a 1°C rise in global temperatures. With 2°C of warming, severe droughts will occur 2.4 times more frequently (IPCC, 2022a).
In particular, rainfall is expected to decrease in mid-latitude or subtropical dry regions as the world warms, including the Mediterranean coastlines of Europe and Africa, Florida, and California in the U.S., southwestern Australia, southern and western Africa, and southwestern South America. This will increase the likelihood of drought throughout the year in these areas.
Additionally, global warming is expected to reduce snowfall worldwide, meaning that rivers dependent on snowmelt may experience up to a 20% reduction in water flow usable for irrigation under 2°C of warming (IPCC, 2022b).
In the longer term, up to 31% of the world’s glaciers could disappear, further decreasing the water flow in rivers sourced from glacial melt. This poses significant risks for regions dependent on these rivers, such as China, Southeast Asia, and India, where the Yellow River, Yangtze River, Mekong River, Indus River, and Ganges River flow from Himalayan glaciers (ibid).
(2) Impact on Business
A decrease in river flow raises concerns about disruptions to agriculture, hydroelectric power generation, water transportation, and drinking water supply.
In agriculture, water shortages combined with rising temperatures and more severe weather events are expected to negatively impact various aspects of farming. This includes soil degradation, a decline in pollinators, such as insects, and an increase in pests and diseases.
In regions such as Russia, where the current average annual temperature is below 10°C, a 2°C rise in temperature may actually increase crop yields (the amount of harvest per unit area). However, in areas where the average annual temperature exceeds 20°C such as Southern Japan, even a slight increase in temperature could result in significant reductions in crop yields (IPCC, 2022b).
Although technological improvements have led to annual increases in crop yields of approximately 1–2% in recent years, this growth has slowed down because of climate change. According to the IPCC Sixth Assessment Report, global crop yields are projected to decline over the next decade by 2.3% for maize, 3.3% for soybeans, 0.7% for rice, and 1.3% for wheat (ibid).
Of particular concern is the increasing risk for simultaneous crop failures for major grains due to global warming. For example, the probability of simultaneous global maize crop failures, which was around 6% in the early 21st century (2001–2010), is expected to rise to 40% with 1.5°C of warming and to 54% with 2°C of warming (ibid).
4. Conclusion
As outlined above, even a 1.5°C or 2°C increase in global temperatures significantly heightens the risks for extreme weather events such as heatwaves, droughts, and intense rainfall, which in turn can lead to water shortages, food insecurity, health crises, and even conflict, posing severe threats to human society.
The effects of climate change are not limited to industries that are dependent on natural resources, such as agriculture, forestry, and fisheries. It also affects a wide range of industries by damaging infrastructure and reducing labor productivity. Furthermore, disruptions in distant developing countries can propagate through supply chains, causing economic turmoil globally.
These risks are not issues in the distant future; they are already becoming apparent and are expected to worsen within the next 5–10 years.
So, what can we do? Naturally, it is imperative to make every effort to reduce greenhouse gas emissions and achieve carbon neutrality as quickly as possible to mitigate global warming.
However, as mentioned at the outset, even if carbon neutrality is achieved by 2050, the effects of global warming will continue for most of our lifetimes. Moreover, the likelihood of achieving global carbon neutrality by 2050 is low. Realistically, the planet is likely to surpass 1.5°C of warming within the next few years, with temperatures approaching 2°C by 2050.
So, what should we do? The only way is to adapt to this new climate reality. Individuals and businesses alike must anticipate the risks that intensifying weather disasters and societal disruptions from climate change will pose to their lives and operations. It is crucial to develop strategies that will minimize these adverse impacts and build resilience.
References
- Dunne, J. P., Stouffer, R. J., & John, J. G. Reductions in labour capacity from heat stress under climate warming. Nature Climate Change, 2013, 3(6), 563–566.
- IPCC “Sixth Assessment Report The Working Group 1”. 2022a.
- IPCC “Sixth Assessment Report The Working Group 2”. 2022b.
- IPCC. Nationally determined contributions under the Paris Agreement. Synthesis report by the secretariat. 2023.
- WMO. Atlas of Mortality and Economic Loss from Weather, Climate and Water Extremes (1970–2019). 2021.
- Japan Meteorological Agency. “Major Weather Extremes and Disasters in the World in 2023 (Reiwa 5)”. 2024.
- World Bank. “The World Bank Supports Thailand’s Post-Floods Recovery Effort”. 2011.
- Ministry of Education, Culture, Sports, Science and Technology, and Japan Meteorological Agency. “Climate Change in Japan 2020”. 2020.
(This is an English translation of a commentary written by SEKIYAMA Takashi, Professor at Kyoto University, which originally appeared on the JFIR website in Japanese on October 7, 2024.)