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WOLF & CO Insights Climate Change Risk Management: Preparation & Protection

Climate Change Risk Management: Preparation & Protection



It can be difficult to imagine all the ways climate change will impact your organization—but this reality is coming, and it’s essential to be prepared. We’ve detailed how you can effectively start to consider your climate risk management initiatives, how you can identify the threats unique to your business, and actionable strategies to implement once all risks are revealed.

Awareness: Get a Pulse of the Market

The first step is acknowledging that climate risks pose a threat to your organization. You must then put these risks in the context of your business: they’re real, but how real to me and my organization?

For example, as an individual, I might pay attention and know a little more about what my contribution to climate change is and how it affects me. I might try to recycle as much as I can, drive an eco-friendly car, or turn off the lights. There’s a personal element that we, as individuals, want to leave the world a better place and maintain a stable global environment for future generations. But we need to start making that same connection to our organizations and think about how they’ll be affected by climate change as well. Start by considering: Can I influence my organization’s policies and practices to prioritize environmental and climate considerations? Have I thought about how my business might be impacted by climate change?

If you’ve started to identify the risks climate change poses to your organization through a risk assessment, what threats have you discovered? Good practice is to look for strategic, reputation, market, and vendor management risks and impacts caused by climate change. An additional best practice is to create a designated committee or pick an executive to be responsible for leadership and oversight of organizational climate-related risks.

If you haven’t started to think about how climate change can affect your organization, you need to start. Generation Z and Millennials generally place more emphasis on the risks of climate change. The first wave of Millennials will become C-Suite executives in the next 10 years. This generational transition might cause the perspective toward climate risk to quickly change to one of greater concern—and if you’re not aligning your business with the market’s stance on climate change, you’re opening your organization up to financial and reputational risk.

Also, regulators are beginning to ask how climate change may impact the future safety of organizations. They’re starting to scrutinize the internal practices of industries that may be negatively impacted by, as well as their responses to, climate change.

Forward-thinking capital markets may reward organizations that proactively invest in their climate risk management, and potentially punish those that ignore it. It’s entirely reasonable to expect that the lack of a climate risk plan could increase your borrowing costs or depress your stock price.

How You Can Identify and Measure Climate Risks

Climate Risk Assessment

The first thing you must do when beginning this process is perform a climate risk assessment, which will give you a full picture of your organization and the risks you’re currently taking. For example, you might start by asking:

  • How do we navigate travel necessities?
    • Do we take planes, trains, or cars?
    • What are the environmental effects of these transportation methods?
  • How do we handle our real estate or offices, both leased and owned?
    • Do we negotiate with our landlords to turn on light dimmers, insert automatic bathroom appliances (toilets, sinks, hand dryers etc.), or air conditioning and heat availability?
    • Are new facilities designed and constructed to be sustainable or have a net-zero environmental impact?

You can then use the climate risk assessment to define specific hazards to your organization.

Define Threats to Your Organization

There are several overarching threats that organizations should consider when determining the impacts of climate change.

  • Strategic Risk

You might have to be careful about which customers and vendors you choose to do business with and who you lend to. You should be thinking about growing industries versus shrinking industries. For example, if you’re choosing between lending to a GMC Hummer or Toyota Prius dealership, take a look at where they’re heading based on the environmental concerns of the world. In fact, GMC recently made news with their planned All-Electric Hummer to be released in 2022. This is clear evidence of consumer trends shifting towards more eco-friendly transportation methods. Start by considering:

    • Who are your customers? What are their expectations of your organization now and in the future?
    • Who are you lending to? Do you have any industry concentrations that may become obsolete with market responses to climate change? Are there emerging industries or technologies that we should gain an early understanding of to be an early partner?
    • Who are you targeting?

These answers should begin to align with the market stance on climate change to ensure you enter into business with beneficial organizations.

  • Reputation Risk

There’s a major reputation risk that will be seen when market perceptions change to be more aware of and favorable towards climate action. You might want to be on the forefront of becoming more eco-friendly in your goals, initiatives, and actions. If you don’t, you run the risk of:

    • Customers not wanting to give you their business
    • Employees not wanting to work with you
    • Negative community perception
    • New talent becoming difficult to attract because of your climate initiatives (or lack thereof)
    • Vendors not wanting to do business with you
  • Market Risk

If you’re not an eco-friendly company, you might face challenges in acquiring new capital, as asset owners and asset managers are evolving sustainability measurements and requirements. A study conducted by Harvard Law School found that the interest in sustainable investing has grown exponentially over the past few years, and that “assets under management (AUM) in ESG mutual funds and exchange-traded funds (ETFs)…has grown from $453B in 2013 to $760B in 2018” and will continue to increase in the next 10 years.

Investor interest has grown significantly in companies that address or offer sustainable investment products, making it a more scrutinized sector for policy makers and stakeholders. Also, The Engine, a venture firm from the Massachusetts Institute of Technology (MIT) that invests in early stage Tough Tech companies recently announced that it raised $230M toward its Fund II. Along with its initial fund (Fund I), The Engine has invested in 27 companies solving global issues like climate change. The additional funding now brings the capital commitments of both funds to $435M, emphasizing the preference given by many investors to companies who remain current with climate change solutions.

Mitigate High Risk Areas

Start to implement policy changes within the organization to help you prepare for these risks. Policy objectives generally fall into two categories:

  • Policies that attempt to constrain actions that contribute to the adverse effects of climate change
  • Policy actions that seek to promote adaptation to climate change

Consider what the operational changes would be if you deviated from your policies. You should prioritize policy and operational changes that would reduce litigation against the organization, as there’s been an increase in climate-related litigation claims brought by property owners, municipalities, states, insurers, shareholders, and public interest organizations. As the monetary loss from such litigation could be immense, risks and threats that are more susceptible to bring litigation should be mitigated. You should also report any corrective action plans made and monitor your activities to ensure processes are working properly.

Action Steps After the Climate Risk Assessment

Step One: Develop a Climate Action Plan

Based on the risks identified, begin to set strategies and procedures that would help you mitigate the impacts of these risks on your organization.

Step Two: Set a Carbon Neutral Goal

A study conducted by S&P Global reports that some of the largest companies in the world are setting major environmental sustainability goals for the coming years. According to the study, “the number of North American energy companies setting net-zero absolute carbon emissions targets exploded during the second half of 2020.” As investors’ concerns about environmental, social and corporate governance (ESG) issues steadily increase, companies in the oil and gas industries are also starting to set these goals.

The research further found that 21 of the 30 largest utilities companies in the U.S., 11 of the 30 largest metals and mining companies in the world, and 11 of the 30 largest oil and gas companies in Europe and North America have set net-zero targets to be reached in the next few decades.

Step Three: Form a Sustainability Implementation Committee

Designate a specialized team of experts to consider all aspects of your organization and how it may be impacted by climate change risk. This committee will be responsible for the creation and initiation of remediation procedures.

Conclusion

Organizations must begin to assess the risks of climate change to their business. This threat might seem far off, but the ever-changing market and public perception are leaning more and more towards clean energy initiatives, and all organizations need to have the correct processes in place for ensured continuity and success.