- Many companies are rightly focused on managing their impact on the climate. But these companies must not forget the impact the climate has on them.
- Climate change is ongoing and will only accelerate with direct effects on global supply chains, economies and geopolitics.
- Business leaders must have a clear view of how they will survive and thrive in the midst of a warming climate turmoil and global pressure to transition to a low-carbon economy.
With plans to reduce carbon emissions in place, the company’s climate strategy is mostly done – isn’t it?
Business leaders who have worked hard to decarbonize their operations may be surprised to hear that they may have a climate risk blind spot. But if leaders don’t consider all the ways climate change could impact their business, they may fail to see the big risks. All companies are potentially affected by climate impacts – even companies with low or no carbon emissions. And the impact is coming sooner than many leaders think. In fact, they are already here.
Understanding the holistic impact of climate change on business
Let me share a short story about one company that found its climate blind spot. Like many other companies, this global conglomerate has committed to sharply reducing the carbon emission intensity of its operations. But when corporate leaders took the time to take a closer look at how climate change could affect businesses, they made important discoveries. Leaders recognize that global heat stress can increase raw material costs. Worse, the company faces the potential for huge revenue losses from customers exposed to extreme weather events. This risk calculation is based on relatively conservative assumptions about global warming – less than 2°C. And this risk is not far in the future. They could become a reality this decade.
The company’s risk analysis also identifies opportunities. Leaders learned that they could create a large new global revenue stream by adding a weatherproof product line.
This company story is an example of how forward-thinking companies are now managing their climate strategies. These companies set clear paths for decarbonizing business – that is, they manage their impact on the climate. But these companies are also focusing on another part of the equation: the impact of climate on their business.
Direct and indirect impacts
What climate impacts should companies pay attention to? Start with the direct impacts of climate change itself. Floods, droughts, fires and increasing heat have disrupted economies and communities around the world. Forward-thinking companies are mapping risks to their full value chains across different warming scenarios. This analysis can reveal some surprises, especially for companies in the low emission sector who may perceive their companies to be underexposed. For example, a global telecommunications company maps the potential impact of hurricanes, forest fires, and floods on its operations. A chemical company measures the potential impact of a carbon tax on its business.
As PwC Global Chair Bob Moritz observed, this is a rare business that doesn’t have offices, factories, or people in the affected areas; no upstream suppliers or downstream customers are exposed to climate change; not dependent on natural resources or ecosystems; and no vulnerability to climate-driven political instability, resource shortages or economic downturn. Business leaders must think now about how their companies will operate in a world where, as The Economist puts it, “beyond 1.5°C warming now seems certain.” Companies that map these risks can now proactively manage them – and use them to spot opportunities.
Climate impacts do not stop at immediate physical effects. Climate change is also reshaping the operating environment for business, driving a shift to a low-carbon economy with increasingly loud calls for change from governments, regulators, investors and the public. Although the transformation of society will be rocky and uneven, the direction of the journey is clear.
Companies need clear plans to navigate disruptive social transformations and redefine business models for a low-carbon world. Penalties increase for companies that do not. For example, global standards are emerging for reporting on climate risk, which are supported by the framework of the Climate-Related Financial Disclosure Task Force. Companies need to disclose their full climate risks such as direct climate change impacts, damage to reputation, abandoned assets, adverse policy changes, cost increases, resource shortages, or even displacement of the company’s entire business model. The US Securities and Exchange Commission (SEC) has proposed new rules to require disclosure of the material impacts of climate risk on companies and their financial statements. Disclosures like this will be studied by investors, lenders, and insurance companies, and will affect a company’s credit rating, rating, loan terms, and insurance rate.
Pricing of climate change risks
Companies must prepare for a non-linear acceleration in the impact this climate-driven environment has on their business. As Harvard’s Rebecca Henderson notes, it’s difficult to assess climate risk because the impact isn’t very visible yet, but it’s changing rapidly. The effects of climate change are becoming clearer, and our ability to model these risks is also increasing. For example, several financial institutions are developing better and better models for measuring client exposure to drought risk. The stage is set for what Mark Carney, former governor of the Bank of England, said could be a climate risk “Minsky moment” – the sudden and widespread realization of the true magnitude of climate risk, which could potentially lead to a sudden decline in asset values for exposed to the company.
The 2022 PwC CEO survey reveals evidence that this tipping point is already occurring. For example, the CEO of a major real estate company told us: “It’s not financially attractive to try to decarbonize a lot of buildings… The speed with which financial institutions refuse to finance those buildings – and investors decide not to buy them – is amazing .
Of course, the flip side of risk is opportunity. Companies that act now to understand their climate change risks will be in the best position to pivot in ways that protect their long-term success.
Climate change is an urgent threat that demands decisive action. Communities around the world have experienced increasing climate impacts, from droughts to floods to rising sea levels. The World Economic Forum’s Global Risk Report continues to place this environmental threat at the top of the list.
To limit global temperature rise to well below 2°C and as close as possible to 1.5°C above pre-industrial levels, it is important for business, policy makers and civil society to advance comprehensive short-term and long-term climate action in line with the goals of the Paris Agreement on climate change.
The World Economic Forum’s Climate Initiative supports the scaling and acceleration of global climate action through public and private sector collaboration. The Initiative works across multiple workflows to develop and implement solutions that are inclusive and ambitious.
These include the Alliance of CEO Climate Leaders, a global network of business leaders from across industries developing cost-effective solutions for the transition to a low-carbon and climate-resilient economy. CEOs use their position and influence with policymakers and corporate partners to accelerate the transition and realize the economic benefits of delivering a safer climate.
Contact us to get involved.
This is what must be done. Remember that a company’s climate agenda must not stop at decarbonizing its operations. Companies must look beyond and beyond corporate walls, taking a holistic view of how their companies will survive and thrive in a warming climate and low-carbon economy. Leaders must understand how a warming climate and economic transition will affect every part of their value chain, and ask themselves tough questions about how their companies will find their place in a low-carbon world. With this analysis in hand, companies will be in a better position to address the risks and opportunities posed by major global climate change whose speed of progress may surprise us.
Businesses have a social opportunity – and a responsibility – to be a proactive part of the solution to one of the greatest challenges for living generations. Companies must help take the lead in building a low-carbon, climate-resilient economy that helps everyone thrive. It’s good for business, and great for the communities that depend on it.