Business leaders are increasingly alive to climate-related risks as they work their way up the agenda. Despite operating in an already-challenging marketplace, decision-makers know that failure to adapt their organisations will expose them to a range of climate-related risks; both material physical risks resulting from climatic events and transition risks emerging from the shift to a low-carbon economy. New legislation, investor demands, changing consumer sentiment, investor pressures and the rise of climate litigation are all transition risks making themselves felt globally.
For some businesses, a failure to respond could see their value proposition lose relevance or their business model become unviable. In fact, Risilience analysis shows that the value of organisations could fall by as much as 30 per cent over the next five years if this very real and immediate threat is not acted upon.
The issue comes down to a clear but challenging question: how can we address these imminent threats without de-prioritising other business goals? Our work with organisations from a variety of sectors has identified three main challenges: financial planning and strategic decisions rarely factor in climate-related implications; climate change is often considered a medium or long-term concern, so action is not prioritised; and analyses of climate-related mitigation strategies often overlook opportunities and upsides.
Failure to adapt will impact profitability
Climate-change-related risks are already impacting profitability and this will intensify dramatically over the next decade for unprepared businesses. Revenues are being eroded by changes in demand, as consumer preferences shift towards more sustainable products and weather patterns alter consumer behaviour.
Businesses that successfully embed these considerations into financial and strategic planning are aware that climate risk is a commercial priority as much as it is an environmental one, and that climate mitigation has both bottom-line costs and economic upsides.
Climate action is a business imperative
The effects of climate risks are being felt more acutely and sooner than many businesses anticipated, as near-term transition risks, including regulation, investor pressures and consumer sentiment, drive direction of travel towards net zero.
Regulation, including Task Force on Climate-related Financial Disclosures (TCFD), and Europe’s Corporate Sustainability Reporting Directive (CSRD), is demanding that companies create, communicate and act on robust plans to reduce climate-risk exposures. Investors are increasingly expecting businesses to take action to reduce their climate-related risk. Markets price in risk several years before it is likely to materialise so investor sentiment can change early and fast.
Without climate-smart strategies, companies will see their market value eroded much sooner than is widely anticipated and find it increasingly more expensive to access capital.
Transitioning successfully brings opportunities
Organisations that pivot their business models to benefit from the immense change that is well underway will future-proof their business models, capitalise on new consumer and technological opportunities, and align with investor demands. Ultimately, they will maintain relevance in a fast-changing environment.
While implementing change on this scale demands considerable investment and is strategically risky; impacting supply chains, product mix, operations and investment strategies, the benefits of making that transition are in plain sight – new commercial opportunities and maintaining relevance in a changing business landscape among them.
The companies that manage this short-term pain successfully will be in a strong competitive position to optimise returns from the opportunities of a sustainable and low-carbon future.
- Dr Andrew Coburn, CEO of Risilience, will present: ‘Building a Credible and Realistic Transition Plan’ at the Reuters Impact event in London on Thursday 7th September, on the Net Zero Stage at 11.10am.
- Dr Andrew Coburn will be among the expert speakers at this year’s ‘Sustainable Futures Conference: Business transformation for the era of climate disruption’, at London’s Barbican Centre on Thursday 12th October. Registration and more details at: https://risilience.com/resources/events/sustainable-futures-conference/