CLIMATE CHANGE: Against the odds

Climate change could present a number of opportunities for business. But only those who are well-prepared to adapt to the changing business environment will be able to avoid feeling the heat of the challenges that lie ahead, says Martin Allen-Smith

For many years, talk of climate change was easily dismissed as an ultra-long-term issue, with any real sense of urgency limited to environmental groups and few others. Just as in politics, making bold or expensive decisions today for something that may or may not bring benefits in 50 years’ time is not often something that business leaders are keen to commit to.

Growing evidence of the changing climate is sharpening the focus however, and the rapidly shrinking timeframes within which tangible changes to the world we live in will become apparent, has meant that the risks – and potential opportunities – are more pertinent than many had thought. The UN’s Intergovernmental Panel on Climate Change recently reported that based on current projections, global warming of 1.5°C is likely between 2030 and 2052.

A report from Zurich Insurance suggests that, with measures to slash greenhouse gas emissions set to miss their targets, businesses should act now and prepare for a changing climate. The report, ‘Managing the impacts of climate change: risk management responses,’ warns that to assume the bigger climate change risks will be headed off by government action would be akin to businesses simply sticking their heads in the sand.

Alison Martin, Zurich’s group chief risk officer and member of the executive committee, said: “Our analysis suggests that the current level of efforts to keep global temperatures from rising over 2°C above pre-industrial levels will likely fail, so businesses should prepare for the physical consequences of a warming planet. Companies must know the magnitude of their climate risk, so that they can prioritise actions based on their particular circumstances. It’s crucial for businesses to develop a climate resilience adaptation strategy and act on it now.”

The report examines two scenarios: one based on the failure to act on climate change, resulting in a steady rise in temperature and rising physical risk; the other assumes that effective measures are taken to reduce carbon emissions, with increasing transition risks to be managed in the shorter term. It also details three steps companies can follow to develop a climate resilience adaptation strategy: identifying the broad business and strategic risks; develop a granular view of the risks including individual locations; and developing a mitigation strategy involving insurance and resilience.

There are signs that preparedness for the impacts of climate change on the business environment is increasingly being addressed by the financial sector. A survey of the UK banking industry by the Prudential Regulation Authority (PRA) found that 70 per cent of banks recognise that climate change poses financial risks. These firms have begun considering the most immediate physical risks to their business models – for example the exposure to mortgages on homes that are at risk of flooding, or the exposure of their investment in countries that could be impacted by extreme weather events.

But banks have also started to assess how the transition to a low-carbon economy, driven by government policy and technological change, may impact the business models of the companies that banks are exposed to. Only 10 per cent manage these risks comprehensively and take a long-term strategic view of the risks. 30 per cent of banks still only consider climate change as a corporate social responsibility issue.

While a transition in thinking is taking place, the PRA is to publish a consultation on its supervisory expectations for banks and insurers. These guidelines will centre on firms’ governance, strategy and risk management in responding to the financial risks from climate change, including the extent to which boards are considering strategically the distinct nature of these risks and the unique challenges they present. Bank of England governor Mark Carney said: “Financial policymakers will not drive the transition to a low-carbon economy, but we will expect regulated firms to anticipate and manage the risks associated with that transition. It is encouraging that the majority of banks recognise this and are already seriously considering the financial risks that arise from climate change.”

Accountancy body ICAEW has also produced – in association with the Carbon Trust – a guide to reporting on climate risks and opportunities. It is intended to help organisations that are considering how best to implement the G20-backed Task Force on Climate-Related Financial Disclosure’s (TCFD) recommendations that were published last year and which, unlike other sustainability reporting frameworks, focus on communicating the financial impact of climate change on reporting organisations.

Dr Nigel Sleigh-Johnson, ICAEW head of financial reporting, audit and assurance, said: “By bringing climate change discussions into the boardroom, the TCFD recommendations could act as a real catalyst for significant improvement in the quality and consistency of disclosures. We hope the final outcome will be a financial system where climate change impacts are well-understood by both companies and investors, and where companies provide great disclosures about how they expect to build sustainable business models, transition to cleaner technologies and mitigate disruption from extreme weather conditions.”

He adds that meeting investor expectations in this respect will lead to competitive advantage, greater confidence in business and ultimately to enhanced access to capital.

Beyond the financial sector, the UK government is urging business and academia to turn its focus on to developing innovative ways of tackling climate change, launching the first Green GB Week in October during which a £60 million government funding initiative was announced for four key research programmes. Business secretary Greg Clark said that the transition to a greener, cleaner economy represented “one of the greatest industrial opportunities of our time”.

In the US too, spurred by consumer demand for eco-friendly practices, many businesses are moving to reduce their carbon footprint, including a major embrace of renewable energy and alternative-fuelled vehicles, according to a report by Deloitte. It found that businesses see addressing climate change as key to long-term industry resilience. Sustainability seems no longer ‘optional’ – it has become important to fostering business growth and satisfying a wide range of stakeholders, including customers, suppliers, partners, employees and investors.

Although Deloitte found that 86 per cent of residential consumers believe government should be active in setting a vision and path for energy strategy, it is the private sector that is advancing the cause to manage resources for cleaner, more resilient, secure and affordable energy supplies.

“Businesses are not waiting for government to act on addressing climate change. They have picked up the gauntlet,” said Marlene Motyka, Deloitte US and global renewable energy leader. “They are now driven to double down on their energy management efforts as they view their long-term viability through the climate lens.”

Perhaps the biggest hurdle to overcome at present is how to bridge the gap between the way companies identify climate-related risks and opportunities and how they are preparing to tackle them.

Research by climate charity CDP and the Climate Disclosure Standards Board found that the vast majority of over 1,600 companies questioned acknowledge that climate change poses financial risks for their business with 83 per cent of companies recognising the physical risks, and 88 per cent identifying policy changes or new regulations as the main risks of transitioning to a low-carbon economy. But when it comes to turning awareness into action, there is still a disconnect in many sectors and countries. For instance, more than 8 in 10 companies oversee climate change at the board level, but only 1 in 10 provides incentives for the management of climate change issues.

Simon Messenger, managing director of the Climate Disclosure Standards Board, said: “The financial implications of climate change are now firmly on companies’ doorsteps and should be integrated in company-wide processes. It is now the time to set up clear strategies to tackle companies’ exposure to climate risks and seize new economic opportunities.

“It is also clear that the management of environmental issues can no longer be the sole responsibility of sustainability teams: it needs to be a priority area for companies’ boards to ensure it is truly embedded into their strategic priorities. We are more than ever at a crunch point between systemically embedding a market failure or embracing a major opportunity to innovate and grow.”


This article was published in the November 2018 issue of CIR Magazine.

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