For many businesses, climate risk is a problem for the future. Rising seas, mass extinction and extreme weather conditions, whilst cataclysmic, are events that others can deal with ‘tomorrow’. But the reality is far more present, warns Dr Andrew Coburn, CEO of Risilience.
Often overlooked, transition risks, business-related risks that follow social, economic and political trends related to a low-carbon and more climate-friendly future, are, by their very nature, more near term – presenting a significant challenge for businesses, now.
We live in a fickle, fast-moving world. Consumer sentiment ebbs and flows on the rising tides of popular opinion; investors decide which companies dive, survive and thrive; and reputations can be wiped out with one extreme event.
Often presented as a cost-prohibitive challenge, climate action actually gives companies an opportunity that business leaders can’t afford to miss. Analyses carried out by Risilience found that the valuation of businesses failing to take climate action could be eroded by as much as 30 per cent over the next five years, depending on company profile and how aggressively they tackle climate change.
And as climate-related legislation increasingly takes hold across the globe; from the proposed SEC Climate Change Disclosure Rule and Fashion Sustainability and Social Accountability Act in the United States, to the European Union’s Fit for 55, the temptation to view climate change as a problem for tomorrow’s enterprises has been eclipsed by the reality that it is a very real problem for businesses today.
Businesses are feeling the heat
The ‘low-carbon economy’ presents pressures from several directions that squeeze margins and force change on companies. Regulations are driving increases in costs to penalise carbon emissions, as demands from shareholders and investors intensify with the expectation that businesses should be responsible stewards of the environment and adopt expensive new technologies to address climate change.
For example, in 2020, asset-investment-management firm Blackrock called on companies to disclose climate-related risks in line with the Task-force for Climate-related Financial Disclosure (TCFD) – and this is not an isolated incident. In 2021, The Investment Association, a trade body with £8.5 trillion under management, announced its intention to flag companies in high-risk sectors that failed to comply with the TCFD legislation – both actions from major, global investment players that should keep any CFO up at night.
Of course, consumers are also applying pressure to the bottom-line as they demand more sustainable products while some refuse to take the hit at the checkout. Research carried out by YouGov found that only a little over half (57 per cent) of consumers surveyed would pay more for sustainable goods in the more climate-mature UK market, falling to as low as 27 per cent in Japan.
And, as business valuations come under threat from climate risk, in some cases, entire product ranges and elements of a company’s business model can be rendered unsuitable by these pressures, especially if these challenges are not identified and swift action taken.
The outlook seems bleak but, as is the case with any market disruptor, the opportunity for business transformation is there to be seized.
Finding order in the chaos
Detailed analysis for where these pressures are likely to erode the value of the business shows where new opportunities can be found.
The low-carbon economy is competitive and plays to the changeable nature of consumers, who can be highly discriminating and prone to switching brands according to how sustainable they believe the company to be – an opportunity for early movers to gain market share.
We can take the lesson from the nineties when early changemakers saw the Internet economy coming. Today we have the green economy, which is gaining momentum, so the choice is whether to grasp the opportunities that it creates or wait until it erodes your business model and, ultimately, the bottom line.
Key actions involve upgrading manufacturing technology in processing plants to reduce emissions; substituting raw materials and suppliers for lower-emission alternatives; changing transportation and distribution fleets to electric vehicles and shortening the distribution footprint.
Finally, companies are finding that motivation and changing attitudes in their management and wider workforce are key to bringing about internal change from within an organisation. Internal incentivisation, shadow carbon pricing and mandating changing practices, such as updating corporate travel policies, are all ways to instil a culture that seeks to prioritise climate action at both the strategic and operational levels of the business.
To develop a comprehensive strategy, each of these initiatives needs to be evaluated for the volume of emissions that are saved relative to the costs and effort required, in terms of capital investment budget and operational change; and the resulting benefits and opportunities that the initiative provides for reducing risk.
A net-zero planning framework is essential and starts from a detailed understanding of the business and where its emissions come from, combined with detailed analyses of the costs and benefits each proposed initiative, respectively, requires and delivers, as part of an integrated strategy.
The cooling effects of data
For some businesses, climate action will be driven by senior risk and sustainability professionals, in other cases it might be the CFO or CEO who claims leadership of climate-related strategy. As with any core business initiative, however, there must be buy-in at the board level, with executive sponsors ready to champion the strategy across the organisation.
A successful net-zero strategy is founded on three elements; climate-change science, business transformation and technology. When combined, and driven by data, all three provide sufficient visibility and operational efficiency such that the business can progress and thoroughly prepare for all risks that lie ahead.
This same data will also be needed to seek and acquire buy-in from the top to ensure the value of acting, and fiscal damage for failing to, are highlighted to decisionmakers and budget holders in the business.
In addition, as we know, actionable insights are essential for driving momentum and evolving strategies. Organisations should seek risk analytics to shape their net-zero journey and truly understand the internal and external pressures that come from their customers, competitors, board and legislators – challenges that don’t lie in the future but sit very much in the here and now.