Understanding the impact of climate change must be integral to business

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Understanding the impact of climate change must be integral to business

Series: Climate Risk & Opportunities Integration

Environmental impact is now an everyday business question. Whether it’s driven by regulation, customer demand or other strategic factors, businesses are being pushed to react and account for their impact on the climate. However, the impact that climate change can have on a business is often less understood, so we’ve developed an approach that helps companies understand the financial implications – not simply as an obligation, but also as a range of risks and opportunities that could have practical implications for the business.

Climate change: risks and opportunities

Climate change is an important, urgent issue: business as usual is projected to increase global warming by 4°C. Regulatory bodies are starting to demand accountability for carbon emissions, customers are seeking to reduce their own footprint by working with low-carbon suppliers, while future workforces and talent are likely to favour employers with demonstrable social and environmental values.

Although many businesses are now reacting to such demands by assessing and reporting their impact on the environment and society, fewer are proactively considering the impact on business of climate, by considering the practical risks and opportunities these represent.

The risks around climate change are complex and interconnected. For instance, global warming affects biodiversity and ecosystems, with consequences for food, fuel or water supply, while its effect on economic inequality could provoke international or local conflict, and damage social or state cohesion. Businesses could be affected by physical risks, from extreme weather events, such as flooding, storms or wildfires; or from longer-term climate shifts that cause higher temperatures and a rise in sea levels. At the same time, moving to a low-carbon economy can also bring transition risks, from policy and regulatory changes, technology developments, shifts in market preferences, disruptive competition, litigation or reputational damage.

Regulators are also raising expectations around governance, management and disclosure on the effects of climate change. In particular, the EU’s imminent Corporate Sustainability Reporting Directive (CSRD) expands the scope of the current Non-Financial Reporting Directive (NFRD), in line with Task Force on Climate-Related Financial Disclosures (TCFD) principles. The CSRD will affect more than four times as many companies as the NFRD, and will require them to identify, actively classify, manage and monitor their climate change risks, among others.

Fundamentally, the CSRD highlights the concept of double materiality – i.e., considering both financial and non-financial (environmental and social) impacts. For businesses, this unites two reporting areas with until now separate teams and processes. Historically, Finance departments carried responsibility for financial reporting, while social or environmental reporting would involve HR, Sustainability or ESG teams. Now, businesses need to start thinking more holistically, right across financial and environmental accountability.

With more integrated accountability processes, businesses will not only be ready to respond to such unified reporting requirements, but they will also be able to recognise the financial implications of climate risks. For instance, extreme weather events could damage parts of the supply chain and disrupt business operations; or climate-conscious customer demand could drive a shift in revenue. Meanwhile, opportunities can also be spotted and developed: a brand with well-managed climate risks could realise reputational and customer gains; while the need for regulatory compliance and physical resilience could stimulate innovation and new business possibilities.

Attitudes to and awareness of climate risks can be seen to vary across sectors. Some – such as energy, oil and gas, shipping and transportation – are highly-visible carbon emitters, and have been working hard to understand their impact on the climate, but haven’t necessarily examined the risks and financial impact on themselves. On the other hand, sectors such as telecoms, media and technology are less obvious emitters, and are generally less mature on sustainability, but are now starting to attract closer scrutiny. Meanwhile, in consumer markets, we see a well-developed awareness at corporate level of sustainability, and what it means for customers, but this has yet to reach individual locations, assets and supply chains.

Across all sectors, businesses can make sustainability into an opportunity to discover how climate risks and opportunities could affect them financially. In our next article, we discuss our simple, practical approach to understanding those impacts, to help companies map out their climate-risk journey, develop an integrated perspective, and understand how sustainable equals successful.

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