Extreme weather risk is scaring big corporations away from poorer countries—that hurts the companies, too

Multinational corporations are increasingly avoiding poorer countries due to climate-related risks, which hurts both the companies and those nations. When planning where to build factories, mines or offices, firms must consider potential future profitability, including risks like flooding, extreme heat, and water scarcity. As climate change intensifies extreme weather events worldwide, these impacts can be particularly severe in developing nations lacking resources to prepare for or recover from disasters.

In her book "Multinational Corporations and Climate Change: Risks, Responsibilities, and Resilience," the author explores how global companies perceive climate-vulnerable markets and how this perception drives some investors to steer clear of these developing nations. Low- and middle-income countries aren't the only ones affected when corporations withdraw. The companies themselves also miss out on business opportunities in emerging markets if they abandon them.

Evidence suggests that multinationals systematically avoid investing in the most climate-vulnerable countries. Studies, including the author's analysis of 159 countries, show a consistent trend: Greater climate vulnerability correlates with less foreign investment. Specifically, a 1-point rise in climate vulnerability on a 100-point scale results in a 12% reduction in foreign direct investment, when other factors remain constant.

While companies rarely disclose the reasons for avoiding specific locations, their concerns occasionally surface. For instance, Google abandoned plans for a $200 million data center in Chile after an environmental court revoked its permit due to potential effects on water supplies and the environment. Similarly, a planned $1 billion data center in Kenya by Microsoft and the Abu Dhabi-based artificial intelligence company G42 faced delays and suspension due to water stress concerns.

Companies understandably hesitate to invest in climate-risky areas. A 71-company analysis revealed that firms experiencing major flood losses saw an average 5% decline in shareholder value the following year, after accounting for overall market movements. In Vietnam, typhoons and floods caused approximately $475 million in damage to energy and transportation infrastructure in 2022, which cost companies around $280 million in unreliability.

Severe flooding in Thailand in 2011 forced major automakers like Toyota, Nissan, and Honda to temporarily halt production as factories submerged, disrupting production of parts or vehicles. These costs highlight how climate risk influences where companies choose to invest. While climate risk doesn't halt all investment in vulnerable markets, it does make such projects more expensive, less attractive, and more difficult to finance than locations with lower risks.

Ultimately, investor avoidance impacts both the companies and the developing countries they leave behind. For developing nations, reduced foreign investment translates to fewer job opportunities and limited access to new technologies brought by multinational corporations. This contributes to global inequality by diminishing economic activity that could spur future development, while simultaneously damaging infrastructure and endangering human health and well-being.