Marika Christopher, Senior Director, Product Strategy & ESG, discusses the importance of establishing consistent frameworks for businesses to incorporate climate risk into their strategies, operations and stakeholder relationships.

This theme is particularly timely given that the U.S. Securities and Exchange Commission (SEC) unveiled new climate-related disclosure recommendations in March. The proposal could bring an ever-sharper focus to environmental, social and governance (ESG) considerations and should help better inform investment decisions when it comes to analyzing climate risks.

Climate Risks Are Business Risks

Risks are inherent in any business. Business owners and strategists make decisions based on the risk and return they expect from each new idea, as well as the potential impact on the rest of the business. While traditional considerations such as market forces, economic drivers and operational considerations are well known and documented in any business’ strategy and financial reporting, climate change and its associated risks are only beginning to be understood and documented in the corporate world.

Consider a real estate project that does not incorporate an evaluation of the land on which it’s being built, or a food services company that does not account for an increase in droughts where its agricultural products are grown. Climate change poses a significant risk for all sectors and companies, especially given increasingly interconnected supply chains across the global economy. Indeed, climate change could be considered the greatest risk facing many industries and companies.

Opportunities in Climate Literacy

Climate literacy within an organization requires both scientific knowledge and a means of estimating future impacts on the business, its supply chain and the end customer.

While climate change can present significant hazards for corporations, it can also open the door to certain opportunities. For example, consider private companies or municipalities that manage waste disposal. They have the option of charging higher fees for regular waste disposal while lowering the costs for recycled and composted items. They may also choose to invest in electric vehicles and optimize driving routes to decrease the amount of time spent gathering waste items. This example is just the tip of the iceberg when it comes to how companies and industries can reshape themselves – often while gaining efficiencies and/or reducing costs – through climate change adaptation.

A Framework for Incorporating Climate Risks

How can companies accelerate their journey to embedding climate risks into their business strategy? Consultant EY has developed a simple 10-step framework that can be utilized across industries.²  Some of the key steps are:

• Seeking board and senior governance oversight
• Developing a firmwide climate change strategy led by the chief executive officer
• Establishing agreed-upon climate language, climate risk management, climate change scenario analysis and enhanced resilience to physical risks

We believe investing in our planet to ensure its sustainability for future generations requires action by businesses across virtually all industries around the globe. Establishing a consistent framework to evaluate and incorporate climate risks into business strategy, operations and relationships with stakeholders is therefore critical.

As part of its 2022 call to action for companies around the world, EARTHDAY.ORG states that “sustainability is the path to prosperity.” This sentiment is central to our view that those companies that can successfully transition to a net-zero economy will be better positioned for long-term growth. The recent SEC climate disclosure proposal – as well as the increased awareness generated by events such as Earth Day and the United Nations Climate Change Conference (COP26) – will hopefully provide further incentives for businesses to evaluate and address climate risks with the aim of mitigating the impact of rising greenhouse gas emissions, achieving a reduction in emissions and adapting to the future impacts of climate change.

 

¹Earthday.org website, April 2022.
²“Ten ways Financial Institutions Can Address Climate-Related Risks and Opportunities” EY, October 2020.

Environmental, Social and Governance (ESG) or sustainable investing considers factors beyond traditional financial analysis. This may limit available investments and cause performance and exposures to differ from, and potentially be more concentrated in certain areas than, the broader market.