As natural disasters cause mass destruction and evacuation worldwide, the risks of a changing climate are being felt far and wide. Yet in many cases, discussions in C-suite meeting rooms are failing to acknowledge the changes happening around us. Generally, there’s been less discussion around climate risk in industries that aren’t traditionally considered carbon-intensive. However, while some industries may have a lower emissions profile, they are still exposed to climate-related financial risks.
In addition, many corporate leaders believe climate risk management is the domain of sustainability teams. But just as climate change affects us all, climate risk is not just the responsibility of your organization’s sustainability team — it’s something that all members of the C-suite, including CEOs and CFOs, must pay attention to.
Climate risk is financial risk
Although climate risk is a risk category of its own, many of the problems associated with climate change’s physical and market-based effects translate directly to financial risk. Climate change’s more visible economic impacts include physical damage to assets through natural disasters, falling asset valuations due to sea level rise, other local environmental changes, and more. These material changes can quickly interrupt business as usual, causing disruptions to supply chains and operations.
In the corporate world, the less visible impacts of climate change include market-based or ‘transition’ risks. The shift to a net-zero global society and corporate environment will see significant changes in market forces — including the declining demand for carbon-intensive products, the rising appetite for new low-carbon products and services, as well as disruptions in supply and the pricing of goods affected by climate change.
Beyond the implications on products and services, public companies and those seeking external financing may see lower valuations and higher credit risk scores due to poor climate risk management. Existing assets — such as buildings and technological infrastructure — may decline in value as a result of energy inefficiencies and high carbon footprints.
Finally, the financial impacts of complying with market mechanisms like carbon pricing may be high enough to put some firms — particularly those in carbon-intensive industries — out of business. Economic consequences may also become a reality for companies that fail to meet disclosure requirements and other environmental targets, whether through financial penalties inflicted by governments and regulators or through a loss of capital from investors. Organizations that become targets of environmental lawsuits may also find themselves required to pay large sums to right their alleged environmental wrongs.
Climate risk is company-wide risk
The effects of climate change are multifaceted and wide-ranging. For example, the physical risks of climate change — such as higher temperatures, rising sea levels, and natural disasters — may affect businesses in the areas of finance, procurement, distribution, transportation, manufacturing, human resources, and more. The transition risks of a changing economy — such as new disclosure and reporting requirements or potential lawsuits from environmental negligence — will require input from legal, marketing and communications, investor relations, finance, and accounting teams. It will also require data from every department, supplier, and partner.
The all-encompassing nature of climate change and the net-zero transition requires climate risk to be managed through a company-wide approach. Siloing climate into sustainability or ESG teams means risk assessments will remain limited in scope and lacking in insight and expertise from across the organization. Similarly, mitigation efforts will run a higher risk of failing since buy-in from relevant departments and leaders is crucial for successful implementation. The C-suite, which comprises representative leaders from across the company, is an ideal place for climate risk management discussions and strategies to originate and to become embedded in top-down decision-making and planning.
The upside of climate risk is opportunity
Leaders who fail to manage climate risk will also fail to spot the abundant opportunities created by the green economic transition. Mitigation efforts, such as fortifying supply chain resilience and investing in operational efficiencies, may produce the kinds of payoffs that would be beneficial regardless of a changing climate. This includes potential cost reductions and improved adaptability
Beyond internal mitigation and adaptation efforts, the stakeholder landscape is undoubtedly changing. Customers, employees, investors, and governments are becoming increasingly invested in corporate climate risk management. Companies that take a proactive approach to managing and communicating their climate risk may claim greater market share among environmentally-conscious consumers and B2B buyers, win the favor of top talent (at lower prices and with better turnover rates), and be granted easier access to capital from ESG-focused investors.
Fast-moving companies may also be able to capitalize on government grants and incentives, such as those available under the US’s Inflation Reduction Act. Other investments in low-carbon R&D and innovation are likely to pay off in the long-run as demand for environmentally-friendly products and services increases.
Climate risk is here and happening
Whether corporate leaders acknowledge it or not, climate risk is real and will continue to grow without proper management. The leaders who embrace the challenges of a changing climate and a new, low-carbon economy will soon discover that climate risk belongs in almost every C-level discussion.
Those who are yet to acknowledge the depth, breadth, and gravity of climate risk expose their organization to any number of potentially catastrophic risks and miss out on turning climate risk into a competitive advantage. Like the tech economy and those before it, the low-carbon economy will see its own winners and losers
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