Environmental risks such as extreme weather, biodiversity loss and human-made climate disasters pose a serious threat to all entities on earth. But what might not be evident is that climate risks are intrinsically business risks.
Organisations are beginning to recognise that climate change will lead to financial instability. In addition, businesses are facing mounting pressure from a gamut of stakeholders, from customers to policymakers, to get their act together.
A study done on the Fortune Global 500 Companies found 23% have publicly committed to becoming carbon neutral by 2030, and it predicted 79% would become so by then.1
On the flip side, the World Economic Forum found that companies focused on climate innovation grew 15% relative to their competitors.2 A different study — from Capgemini Research Institute — found sustainability initiatives helped boost sales for 63% of organisations.1 The main source of this revenue came from exploring new markets and developing new products.
The Types of Climate Risks in Business
Climate innovation is a win-win strategy for businesses that helps increase revenue while decreasing environmental pollution.
But putting aside incentives, climate risks lead to these costly businesses risks:
Transition Risks: this can include technology, liability or reputational risks, but it primarily refers to risks due to policy change. Policies such as carbon taxes, minimum energy efficiency requirements and reporting requirements are making a shift to low-carbon economies necessary. Companies that are not prepared will face asset revaluations, increased cost of operations and penalties.
Capital Market Risks: climate change is affecting how companies finance their assets with debt or equity. A study from INSEAD found climate action was the most important sustainability factor when evaluating an investment target for institutional investors. Another study found investors are willing to pay $0.70 more per share for socially responsible companies and penalise socially irresponsible companies with -$0.90 per share.1
Customer Risk: customers have become increasingly carbon-conscious in their purchase decisions. Businesses that ignore buying behaviour risk missing out on opportunities in the present and struggle to survive in the future as competitors offer similar products with lower carbon footprints.
Talent Risk: employees expect their organisations to commit to carbon neutrality. In 2019, employees from tech giants like Google, Amazon and Microsoft went on The Global Climate Strike, protesting their organisation’s inaction on climate change and calling for a climate plan. Later that year, Google, Salesforce and others committed to fully run on carbon-free energy by 2030 to retain their top talent.
The Scope of Business Decarbonisation Strategy
Given the rise of climate response expectations from regulators, investors, customers and employees, businesses need to reconsider their well-established strategies to deal with these new protocols.
Many companies have committed to climate actions such as using 100% renewable energy and setting a carbon price. Those that haven’t risk losing their competitive edge.
Before companies embark on an emission reduction target, they need to understand the scope of their full carbon footprint, including:
Scope 1: direct emissions from sources such as company facilities and vehicles.
Scope 2: indirect emissions from generations of purchased electricity, including business travel and purchased goods.
Scope 3: all other indirect emissions not included in scope 2, such as leased assets, investments and franchises.
For most companies, scope 3 represents the biggest source of emissions. They’ll have to factor in decarbonisation risks across their entire supply chain by:
Working with suppliers to reduce their emissions.
Switching to suppliers with lower carbon footprints.
Redesigning products using circular economy principles.
A Toolkit to Revamp Business Strategy for the Climate Risk
Developing a clear climate strategy means businesses have to set appropriate emissions targets and use those targets to guide their actions and business decisions. Aligning the two will help them build a sustainable business and operating model while reducing emissions.
The steps to developing a climate-action business-strategy include:
Remodel the Business
Put a carbon price on products and services.
Increase product lifespans.
Utilise a product-service system to cut carbon footprint.
Use efficient and green logistics.
Work With Suppliers
Influence suppliers to reduce their emissions.
Create incentives for using greener channels.
Reconsider Procurement Policy
Purchase from suppliers with lower carbon footprints.
Switch to products that are low-carbon alternatives.
Design Greener Products and Services
Lower lifecycle emissions by designing more efficient and longer-lasting products.
Utilise circular economy principles in product and service design.
Engage Directly With Customers
Engage directly with customers through education and collaboration.
Help customers choose the greener alternative.
Revamp Operational Policies
Launch operational protocols and incentive programmes that align with climate actions.
Build a Climate-Focused Investment Strategy
Invest in low-carbon projects and shift away from fossil fuels to speed business transition to a low-carbon economy.
These are the quintessential steps in decarbonising your organisation. How do you leverage climate innovation to build on these strategic points for business benefits?