Laura Zizzo, Co-Founder and CEO of Manifest Climate.
We hear about the challenges of climate change every day—from the growing pains of the low-carbon transition to more severe and frequent extreme weather events (floods, storms, fires) happening globally. But what often gets overlooked is the disastrous effects that climate change could have on businesses.
Research shows the financial risks of climate change are significant. According to a report (download required) by one of the world’s largest reinsurers, climate change could cost the global economy 11%-14% of its value by 2050. If governments fail to act, that could rise to nearly a fifth.
Thankfully, regulators and investors are beginning to recognize climate change’s potentially catastrophic financial impacts. In response, many are requiring companies and organizations to publicly disclose climate-related financial risks and opportunities.
Currently, most climate-related financial reporting requirements align with the global reporting framework called the Task Force on Climate-related Financial Disclosures (TCFD), which the Financial Stability Board established in 2015. The TCFD provides organizations with 11 recommendations for publicly disclosing their climate-related financial risks and opportunities under four pillars: governance, strategy, risk management and metrics and targets. The framework has gained considerable momentum and is now used by more than 3,800 organizations. Notably, the world’s largest economies, including financial regulators across the G7 and G20, which represents 85% of the global economic activity, have embraced the framework as a systemic financial risk rather than just an environmental issue. From the UK and Europe to Canada, several jurisdictions have outlined TCFD-aligned regulations or will follow soon, including the U.S. Securities and Exchange Commission’s forthcoming rule.
This growth in climate disclosure reflects a global policy agenda concerned with better understanding climate impact, so it can be measured and managed. But more importantly is the realization by businesses that understanding the risks and opportunities presented by climate change brings a competitive advantage.
Whatever the size of your business, let’s get into how climate disclosure and risk planning can help you succeed.
Future-Proofing Strategy And Resilience
With climate change fundamentally affecting the global economy, there are a number of actions businesses can take to build resilience. A practical first step is to assess the organizational and system-wide changes that will impact your organization. These changes will be evident throughout the value chain. From the resilience of supply chains and infrastructure, to changing consumer needs and preferences at the other.
A good corporate strategy should account for all of these changes, mitigate risks and maximize opportunities as the economy adapts to a changing climate. Another useful way to check that your strategy is climate-aware is to use the TCFD’s scenario analysis exercise. This examines the risks and opportunities within a company strategy against different climate change scenarios.
Companies that take climate disclosure and risk planning seriously as a strategic exercise may be more resilient to market shocks and better able to take advantage of macroeconomic trends. To help turn plans into action, companies should then consider linking executive compensation to climate targets or joining one of the many climate-focused business coalitions to collaborate on innovative solutions.
Winning Customers
Corporate climate disclosures are overwhelmingly popular with U.S. consumers. Research from JUST Capital shows that 87% of Americans think it is important for companies to disclose their greenhouse gas emissions, and 86% support federal requirements for corporate disclosure on climate metrics that would standardize reporting and analysis across companies and/or industries.
Americans are ready to vote with their wallets when it comes to doing something about climate change. Over 75% are concerned about the impact of what they buy and 80% of young Americans (ages 18-34) are willing to pay more for sustainable products versus less environmentally aware competitors according to the Business of Sustainability Index.
Access To Capital
The financial system—banks, insurers, asset managers and asset owners—are committed to lending to, underwriting and investing in those companies that are aligned to achieving Net Zero by 2050. Clearly disclose your company’s climate data, risks and opportunities and outline a transition plan towards a lower carbon future to improve your chances of attracting investors and to qualify for lending and other financial backing.
Attracting And Retaining Talent
According to a recent survey of 4,000 workers by sustainability leader and former Unilever PLC CEO Paul Polman, 75% of U.S. workers want to work for a company that is having a positive impact on the world. The same survey found that 51% said they would consider resigning if the values of a company did not align with their own.
This is a threat, but also a huge opportunity. Companies that can clearly articulate ways of working that balance the needs of profit, planet and people, will be able to access the widest range of talent, motivate and retain them.
Staying Ahead Of Regulation
I believe the trend for regulators and Governments asking for more climate, nature and other sustainability-related disclosures is only going to accelerate. Over 100 countries are recommending the use of TCFD and several have mandated it, including the UK, Switzerland and New Zealand.
Thus, I find that it is better to get ahead of this regulatory wave and reap the benefits of leadership than wait to be hit by it and react. This is particularly important for international companies that are required to report across jurisdictions beyond the U.S. like the EU and UK.
Responding to the financial implications of climate change will require significant reallocation of capital. The United Nations-backed Race to Zero climate campaign estimates that $125 trillion is needed to help the world to zero out emissions by 2050, while the International Energy Agency says annual clean energy investment must triple to about $4 trillion by 2030.
These changes will affect all businesses. Companies that are proactive in developing robust and transparent climate management plans and strategies can be better positioned to succeed in a climate-adjusted future. But to overcome their risks and get ahead, businesses need to pick up the pace and start thinking about climate as a strategic business imperative. There’s no time to wait.
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