Over the next 20 years, we will experience receding ice cover, heatwaves, rising sea levels, wildfires, storm surges and other extreme weather events. These climate impacts could cause significant losses, damage, or disruptions to our food systems, drinking water, infrastructure, and the energy systems that fuel our modern lives. They may also disturb our forests and ecosystems, health, politics and governance.
Global economic damage of a 2-degrees-Celsius increase in global average temperature is expected to cost $69 trillion by 2100, according to the UN’s Intergovernmental Panel on Climate Change. This projection may also be overly conservative, because economic models may be underestimating the risks and the economic loss of spending money rebuilding the damaged built environment rather than on new productive investments.
We are currently on track for a 3-4-degrees-Celsius increase by 2100 based on current government policies and pledges, according to Climate Action Tracker. To put that into context “the difference between the temperature we have on the planet today versus an ice age is only five or six degrees Celsius,” Blair Feltmate, head of the Waterloo-based Intact Centre on Climate Adaptation, told the Canadian Press.
What does this mean for your business?
It means it is imperative to assess, manage and disclose your climate-related risks and opportunities. It is also important to take stock of global trends, examine what your peers and competitors are doing and find out what stakeholders are expecting. A thoughtful plan and robust climate business strategy will set organizations on a path to: more fully understand, and be better prepared for, risks; identify opportunities; and, continue to thrive in future scenarios.
How to develop a climate strategy
Know your risks
The first step in risk mitigation is to identify and understand relevant risks. This holds true for climate risks as well, but the identification and understanding stage can be daunting. Your organization may face a variety of climate-related risks, both the physical impacts and the risks associated with transitioning to a low-carbon economy. For instance, your physical assets may be vulnerable to flooding (physical risk) or you may emit a large amount of carbon emissions that could be subject to new regulations or a carbon price (transition risk). Tools are emerging to help your organization understand both types of impacts.
During the transition, there will be changes to the political, legal, technological, and market landscapes. Policies to mitigate carbon pollution or advance adaptation will bring changes to markets. In recent years, there has been an increase in lawsuits by property owners, government bodies, insurers, shareholders, and public-interest organizations – these will likely continue. Winners and losers will emerge as new technologies displace old systems. The demand for certain commodities, products, and services may change as climate-related risks and opportunities are increasingly taken into account. Customer and community perceptions may also change based on an organization’s contribution to climate change.
Understanding and prioritizing a response to your climate risks is an important step in developing a climate strategy.
Explore opportunities
As we mitigate and adapt to climate change, new opportunities will arise. This may result from increasing resource efficiency and cost savings, building a resilient supply chain, sourcing low-emission energy sources, developing new products and services, or accessing new markets.
For instance, climate-friendly products that capture or remove carbon from the air or industrial sources are expected to play a big part of global mitigation. Where emissions need to decrease, new technology, services or businesses will likely need to play a part. These new solutions may also become attractive to investors with large pools of capital looking to invest in sustainable-finance opportunities.
Examine your organization
You will also need to understand the existing work across your organization that supports adaptation, mitigation and finding new climate-related opportunities. Your teams may be doing great work or thinking of innovative solutions. There is an opportunity to see these actions through a “climate lens” and increase agency (and incentives) to move climate-smart actions forward with more urgency.
When examining your organization, you should explore how climate change impacts your governance, strategy, risk management, and what metrics and targets can be used to support climate resiliency.
Governance
Your organization’s governance and climate-related risks and opportunities matter. Who is responsible for climate and what authority and accountabilities do they have to set and implement the agenda within your organization?
Strategy
You should assess the impact of climate-related risks and opportunities on your organization’s strategy and financial planning. Is there a plan in place that has been approved and supported by senior leadership?
Risk management
Climate change should be incorporated into your organization’s risk management processes to identify, assess and manage climate-related risks. Have the risks been identified and has a plan been put in place to manage them?
Metrics and targets
Your climate strategy and governance should be tied to metrics and targets used to assess and manage relevant climate-related risks and opportunities. What metrics and targets are most relevant to the risks and opportunities you have identified? Is there accountability for tracking progress?
Do a competitive analysis
Inspiration and motivation can be increased by looking at your peers and leaders in other sectors. In this fast-moving space, taking stock of leading climate strategies and approaches in your industry and beyond will be an ongoing task. As well, processes and information assessed could be compared to the recommendations from the Task Force on Climate-related Financial Disclosures (TCFD). TCFD is not only a guide to best practices around disclosure but is also a good framework to understand how to build an effective climate strategy. These assessments can then be used to develop a gap analysis of your work compared to industry best practices.
Explore the uncertain future
We know the climate is changing. But there is a great deal of uncertainty around the scope and scale of both physical climate impacts and the transition to a low-carbon and resilient future. Climate scenario analysis provides a framework to understand, approach, and manage the challenge that climate change presents to business decisions.
Climate scenario analysis explores what a company’s business environment might look like under different climate scenarios, such as deep decarbonization or unconstrained climate change, and then integrates this information into your organization’s strategy. The scenarios offer different pathways, such as orderly or disorderly decarbonization, to understand potential changes to regulations, industry standards, technology, etc.
