Assessing climate risks and opportunities

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Assessing climate risks and opportunities

Awareness of climate and sustainability is essential in identifying and assessing the associated risks and opportunities

In our previous article, we outlined the urgency of understanding the impact of climate change on your business, touched on regulatory developments, and introduced physical and transition risks. Here, we discuss our step-by-step climate-risk journey, which can help businesses understand what abstract goals and commitments mean in terms of practical business actions and impacts.

Even when a business understands that it needs to reduce its carbon emissions, this can lead to siloed thinking, which isolates pursuit of that goal from core business activities. Our four-step approach helps companies recognise how climate – by its direct, physical impact, or the transition to a low carbon economy – can affect core activities and finances, to help mitigate risks and realise opportunities. 

As a first step, we determine the organisation’s level of awareness and, where necessary, make it greater and more consistent. Many businesses have by now gained some sustainability knowledge, but the extent can vary, so we typically conduct initial interviews to assess the company’s climate maturity, and identify key stakeholders. Suitably pitched learning sessions across functions then engage staff and develop their capabilities, while separate board-level sessions help, say, the CEO or CFO recognise how climate change affects finance, assets or operations – as well as gain an understanding of the regulatory and reporting landscape. The process creates business-wide common ground around climate risks, so teams can integrate them into existing workloads, to inform better decision-making both in day-to-day business and at board level. 

Having created a common level of awareness, our second step is an assessment of specific, practical ways in which climate risk impacts the company. For instance, the geographic location of a retailer’s distribution centres, major stores and key logistics channels are subject to physical risks from acute or systematic weather events locally, while a manufacturer’s raw material supply or shipping might be subject to other physical risks elsewhere in the world. Conversely, early investment in decarbonisation technologies could represent an opportunity for competitive advantage, whether though lower energy costs or reputational gain. As with awareness, businesses vary in maturity, from those well-advanced in identifying and including such risks in business processes, to those only starting to consider such questions.  

These are relatively quick wins: we can kick-start the process in just four weeks for an initial review of maturity and impacts. Our involvement adjusts to suit what’s needed, but typically involves an initial qualitative assessment, to identify the physical and transition risks and opportunities for a business from climate change. Using this knowledge, our own analysis quantifies the likelihood and severity of these factors under several future climate scenarios, to produce a map of risks and opportunities across regions. This analysis considers several scenarios – such as a +4°C ‘business as usual’ case and a Paris Agreement case of +2°C – to consider the practical implications of each scenario for the business, including operations, assets and supply chain, and the financial consequences for profitability and the balance sheet. Beyond this general analysis, we apply more detailed modelling to reflect company- and sector-specific factors and concerns, drawing on macro-economic and regional data. Our aim is to provide a digital dashboard that incorporates a client’s own data, and presents a dynamic geographic overview of pain points, major risks or opportunities, and their impact on the business. 

Assessment lies at the heart of our approach, and gives a business the insights to become more resilient to climate change, mitigate its financial impact, and capitalise on the opportunities it presents, while becoming more prepared for current and future regulation. Our next article considers how these risks and opportunities can be integrated into business processes, to build more robust organisations. 

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