The Intergovernmental Panel on Climate Change (IPCC) Report of August 9th, 2021 is a ‘reality check’.
Climate change is widespread, rapid and changing. The unprecedented fires in Greece, Turkey, Italy and in many places in America bear this out. Recent catastrophic downpours and flooding in Germany and parts of the UK make stark viewing. Some of the damage done to our planet is irreversible. This crisis is perhaps the greatest we in the modern world has ever faced. Strong and continued worldwide reduction in carbon emissions would see a limitation to damage, but beginning today, it would take at least 20 to 30 years to sees the benefits. Something’s got to give. Change is now or never. So what does this mean for businesses, what does it mean for how we do things in our businesses, what are the risks, and how do we mitigate these risks and protect our businesses.
According to Forbes ‘A warming planet creates a wide range of risks for businesses, from disrupted supply chains to rising insurance costs to labour challenges. Climate change and extreme weather events such as hurricanes, floods and fires, for example, have a direct impact on 70% of all economic sectors worldwide.
A survey conducted by Deloitte last year of almost 1,200 financial executives from European companies found that most are feeling pressure to act on climate change from a variety of stakeholders including their employees, regulators and investors. Of the larger companies surveyed, 70% of CFOs reported feeling pressure from their customers to act.
According to McKinsey, companies need to take climate considerations into account when looking at capital allocation, development of products or services, and supply-chain management, amongst other things. This will require a change in mindset, new operating models, and tools and processes to integrate climate risk into decision making.
Businesses will need to address climate change risks on two fronts. Firstly, what are the potential risks that could impact the financial stability of the company, i.e. the company’s balance sheet and secondly, what stance is the company taking on climate change and how is this communicated to all relevant stakeholders. Environmental, Sustainability and Governance (ESG) will be paramount going forward. Customers and shareholders will want to know who we are doing business with and how we are doing our business. Getting our heads around ESG is very new for a lot of companies, but if we want to grow and sustain our businesses into the future, we will have to get our heads around it.
• Assets, buildings and sites – where is their location and how would future climate disasters potentially impact the value of the sites, their insurance and ability to leverage against borrowing or investment. Difficulty in securing mortgages for properties that lack energy efficiency or unstable locations.
• Insurance – Rising insurance costs if property is located in vulnerable areas, if supply chains are vulnerable and could cause business disruption, loss of business or sales due to reputational damage if the business isn’t clear on its stance on climate change.
• Supply Chains – Every business will need to know what the carbon footprint of their supply chain is. Over 90% of companies’ carbon footprint is located in the supply chain, often generated by suppliers on the other side of the world. However, very few companies measure the carbon emissions of their supply chains. It’s an erroneous task but companies will need to plan on how this can be calculated and move to supplier who are carbon neutral or local suppliers. New technology can help in these calculations.
• Carbon Emissions – Whilst it is not compulsory yet to report your carbon footprint, this is only around the corner. Many companies have signed up for the Carbon Disclosure Project and Business in the Community Ireland (BITCI). These companies are proactively managing their customers, investors, regulators, shareholders and the public at large expectations. It will become mandatory to carbon report in annual financial accounts. This will mean increased transparency for companies and costs. Carbon taxes are on the way. €10 per tonne of carbon emission will make a dent on profits. We need to act now. Companies need to look at ways or getting to carbon neutral output, e.g. planting trees, renewable energy, packaging, new energy efficiency ways of doing business, how are we doing it now and how can we do it differently. Failure to adapt will result in a backlash from stakeholders and/ or litigation. Heathrow Airport Case.
• Employees and Stakeholders – Companies are being scrutinised on their approach to ESG. Are the promoting and working towards positive policies in their organisation to promote a positive workplace for their employees. Getting this wrong can have a huge impact on both profitability and reputation.
• Investors – Savvy investors are tuned into ESG. Any reputational damage can sink share prices. With everything that is coming down the track on climate change, investors are only interested in companies who are visibly managing their ESG and carbon emissions policies.
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