The world is warming. How will that impact your company’s business?
The macroeconomic costs of climate change and climate-related disasters will continue to rise alongside global temperatures. Individual businesses can expect to experience further interruptions of essential services and supply chains as existing infrastructure buckles under the weight of extreme weather events around the world.
But businesses shouldn’t just be focused on supply chains when calculating the value of their sustainability efforts. Environmentally conscious investors have grown more interested in backing firms that actively measure and audit their environmental, social, and governance (ESG) practices and processes. Regulators are also raising their reporting requirements, furthering transparency into an organization’s environmental impact and mitigation actions. Failure to improve these efforts can do increasing damage to a business’ brand, resulting in lost customers and capital.
In the coming decade, an increase in climate change and climate-related disasters will push businesses to adopt an array of ESG practices and procedures, including GHG monitoring and reduction goals, dedicated ESG budgets, and sustainability metrics integrated into financial and board reports. These will have a profound impact on supply chain management, investment decisions, as well as operational and strategic decision making – not to mention the environment itself.
The Need for Speed
Disclosing climate risk and setting targets to reduce GHG emissions is still relatively new to the business community, but we expect disclosure to accelerate in 2021. Climate risk reporting received a kick start when the Task Force on Climate-related Financial Disclosure (TCFD) was launched in the wake of the 2015 Paris Agreement, which aims to keep the global temperature rise below 2°C this century.
Risk can’t be mitigated if it’s not recognized. Some leading companies have begun addressing climate risk, but the world needs faster uptake. A 2020 KPMG survey found that just 56% of the world’s largest 250 companies state that climate change is a potential risk to the business in their annual financial or integrated report, and only 46% report a net-zero target or science-based reduction target.
Read: The New Urgency for ESG Risk Management
Momentum from Investors and Governments
While the business community moves unevenly to address climate risk, investors are not sitting idly by; activist investors of U.S. companies filed at least 140 climate-related shareholder proposals during the 2020 proxy season. The Climate Action 100+ investing group, representing over $47 trillion in combined assets, is on a five-year mission to encourage the world’s largest corporate emitters of GHGs to take action on climate change. It has assembled an initial list of 161 companies that it will push to establish net-zero emissions and other environmental measures. In Europe, the 275-member Institutional Investors Group on Climate Change (IIGCC), managing a combined €35 trillion in assets, is using its weight to actively support the Paris Agreement, TCFD, and the U.N. Sustainable Development Goals.
Central banks have joined to support the development of environment and climate risk management in the financial sector. The Network for Greening the Financial System (NFGS) was launched in 2017 and includes all major central banks worldwide, with the U.S. joining just recently. Its 2020 activities included creating a guide to climate scenario analysis for central banks. In the U.S., President-elect Biden campaigned on getting the country back into the Paris Agreement and has appointed a cabinet-level U.S. Special Presidential Envoy for Climate. He will also select a new chairperson of the Securities and Exchange Commission (SEC). More stringent SEC-mandated climate risk reporting and disclosure of GHG emissions and reduction targets are likely as the new Biden administration sets climate-related priorities for 2021 and beyond.
Steps for Organizations to Take
Risk mitigation is often viewed as a cost rather than a value generator until some issue rears its ugly head and causes real economic loss. Risk managers will have a better chance of reaching senior executives and the board if they frame climate change as a financial case.
1. Identify climate-related risks and determine your company’s exposure.
Business resiliency is a key concept here. Scenario analyses and modeling can estimate the downtime and financial costs of modifying or moving operations compared to potential losses. The TCFD provides helpful guidance on conducting such examinations.
2. Do not overlook the extended supply chain.
Investigate suppliers to determine exposures to extreme weather events, and do scenario testing to create a solid plan to cope when disaster strikes. (No company wants to mimic what happened to Western Digital in 2011. It sustained $199 million in losses when extreme flooding in Thailand severely impacted its suppliers' hard drive production.)
3. Begin reporting GHG emissions and establish a net-zero emissions plan.
Mandated GHG reporting is on the horizon and emissions limits are not much further behind, so plan accordingly – and don’t discount reputational risk. Massive climate change protests were already occurring when the COVID-19 pandemic and Black Lives Matter movements happened. These protests will return, along with other types of activism, such as calls for boycotts.
A trickier case to present is the ethical obligation of every business to do its part to prevent the habitat destruction, species collapse, mass human migration, negative impacts on food supply, and massive economic losses scientists have predicted with a 2°C+ increase in global temperature. Asking what kind of world do we wish to leave to the next generation, however, may be the most persuasive argument.
