Climate risk and decarbonisation

Understanding the impacts of climate on your business

Lucy Piper
Professional male in glasses, black and white portrait

Every business needs to move to net zero

As governments around the world make commitments to net zero targets, there will be increasing pressure on every sector to set their own targets in order to meet national carbon emission limits. It is only a matter of time before corporate emissions are regulated, so businesses that are slow to transition may find it even more challenging than those who are already setting science-based targets to achieve net zero.

Ultimately, every business needs to move to net zero – whether they do it in the next decade or the next two, or even three decades – this will be business as usual, so corporate executives need to take ambitious action now in order to future-proof their companies and succeed in a net zero economy.

What are the key things a company needs to consider?

If you’re motivated by a personal sense of urgency around the climate crisis and want to influence your corporation to decarbonise, the most critical argument you can focus your business case on is how your company is tackling climate risk – i.e. how their profits, operations, reputation, staff and customers will be negatively affected by both the physical and financial impacts of the climate emergency.

What is climate risk and how do we measure it?

Every company across every sector will be impacted by climate risk in different ways, and certain industries will likely be more heavily impacted (eg Finance, Energy, Transportation, Materials and Building, Agriculture, Food and Forestry Products).

 Understanding the implications on your own industry is the key starting point for building a business case to mitigate climate risk within your company. There are three categories to consider: physical risk, transition risk and reputation risk. 

Physical risk

This describes both the acute risks (event-driven, severe weather events and bushfires) and the chronic risks (increasing global average temperatures, sea-level rises etc) that might impact a company’s finances and operations in the future - how might acute and chronic risks affect your company and its operations?

 Transition risk

This describes the risks associated with a transition to a renewable, low-carbon economy. This includes:

  • Policy actions that could impact operation
  • Legal risk that would expose a business to litigation due to climate associated losses
  • Technology innovation that might disrupt competitive landscape, viability of assets or change in demand
  • Market shifts that could impact supply and demand, prices and costs

Reputation risk

This describes the risk associated with the changing perceptions of a corporation’s stance on climate and failure to transition rapidly to renewable economy. This includes:

  • Decrease in consumer demand
  • Progressive competitors increasing market share
  • Declining staff engagement and talent acquisition
  • Supply-chain obstacles as contractors manage their own climate risk
  • Limited access to capital and investment due to support of/exposure to fossil fuels

Once you have a basic understanding of key risk areas, ensure you are getting an accurate measurement of your climate risk with the guidance of your professional financial services and auditors, as these providers will have their own detailed climate risk metrics and can assess your exposure to a higher degree of accuracy.

Your next step: Understanding the barriers to taking action
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