Evaluating Climate Risk as Business Risk
By Bob Conlin, President and CEO of NAVEX Global
It wasn’t that long ago that “climate risk” was an assessment of how climate or weather-related issues could impact business operations and supply chains. That’s certainly still a good and essential practice for risk managers. Today, however, there is a different climate discussion happening in the board room. This discussion focuses on how business operations impact climate. It’s a bilateral relationship, of course, between business and climate. In this discussion, climate isn’t just an operational risk — it’s reputational as well. In simple terms, changing stakeholder concerns about the environment are driving these discussions.
Generational shifts drive part of this evolution. While the notion of sustainability isn’t exactly new (the U.S. Environmental Protection Agency and Earth Day both just celebrated 50-year anniversaries), millennials and younger generations have a higher level of concern for environmental issues than previous generations. Both employees and consumers are also more apt to share their values publicly and voice concerns and expectations of businesses. They also have communication vehicles — and wallets — to make themselves heard. In turn, investors now see environmental issues as having a potentially greater impact on valuations and share prices.
Today we have employees, customers and investors pushing for companies to reduce their carbon footprints and demonstrate commitment to sustainable practices. Responsible business leaders want their organizations to be good corporate citizens for at least two good reasons: because it’s the right thing to do, and because they want to attract high-performing talent, new clients and capital.
Different Risk Profiles
While there are many mission-driven organizations that find purpose in fighting climate change with net-zero carbon strategies, most businesses are born to deliver a product or service profitably. However, business leaders are still left to answer questions about their company operations and what negative impact they may have on the environment. These factors are likely afterthoughts unless you’re in an industry deeply connected to environmental issues; a software company obviously won’t have the same risk profile as one in the oil and gas industry, for example.
Suppose you’re an established business without an obvious or significant tie to environmental issues. How do you balance a desire to be a good corporate citizen and environmental steward with the business imperative to deliver profitability? How do you determine how much to invest in time, money and resources? Where is the tipping point in the desire to reduce carbon emissions before adversely impacting ROI? And what is the risk of doing nothing? The answers to these questions are unique to every company, but I would suggest starting with evaluating your stakeholders’ interests to help guide these decisions.
• Who are your customers? What drives their purchasing behavior? Will they pay a premium for sustainable products or services?
• What do your employees care about? Do the company’s corporate social responsibility programs play a role in recruiting?
• Have your investors inquired about your ESG metrics? How have you been able to respond? Are you missing out on capital-raising opportunities without ESG reporting?
Getting The Board On Board
Balancing your stakeholders’ concerns and those of your other shareholders is not as difficult as it used to be. The rise of ESG investing is proof positive and has an immediate impact on a company’s ability to access capital. That’s why you’ll find your board more receptive to these topics than a decade ago; directors understand that reputational risks are business risks.
It’s much easier to discuss climate and sustainability as part of a broader risk management discussion, so come to the table prepared to discuss stakeholder preferences and concerns. This preparation will support a strategic conversation about the business’s goals and the performance metrics you should use to monitor progress.
A good “climate risk” mitigation plan will help you protect your company’s reputation; a great plan will help you build a better business.
Article Link: https://www.forbes.com/sites/forbesbusinesscouncil/2021/05/12/evaluating-climate-risk-as-business-risk/?sh=1f15de935145