Risk & opportunity

Climate change poses immediate physical and transition risks to businesses, as well as opportunities to achieve strategic goals and increase value for shareholders

Climate change is already causing businesses to face physical risks from acute or chronic weather events, and transition risks from the need to adapt to the changing policy and regulatory context. For a business to mitigate or adapt to these risks they need to be understood. External stakeholders, and particularly investors and financial regulators, are increasingly putting pressure on businesses to disclose their financial risks linked to climate impacts. This is likely to build as temperatures increase and the physical impacts of climate change intensify.

Efforts to mitigate and adapt to climate change also produce opportunities for businesses to make cost savings, adopt low-emission energy sources, develop new products and services, access new markets, and build resilience along the supply chain.

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Risk

There are a range of physical and transition risks to consider, and these should be assessed across the whole value chain (for example investors, suppliers, own operations and distributors). These include transition risks:

• Policy and legal – increased pricing of GHG emissions, enhanced emissions-reporting obligations, mandates on/regulation of existing products, exposure to litigation.
• Technology – substitution of existing products and services with lower-emissions options, unsuccessful investment in new technologies, costs to transition to lower-emissions tech.
• Market – changing customer behaviour, uncertainty in market signals, increased cost of raw materials.
• Reputation – shifts in consumer preferences, stigmatisation of sector, increased stakeholder concern or negative stakeholder feedback.

And physical risks:

• Acute – increased severity of extreme weather events such as cyclones, fires, drought and floods.
• Chronic – changes in precipitation patterns and extreme variability in weather patterns, rising mean temperatures, rising sea levels.

Watch our sessions run in collaboration with the Global Association of Risk Professionals (GARP) to explore how the board could respond to climate risks using interactive scenarios:

Physical Climate Risk Scenario

Explore questions that help boards factor the implications of physical risks into their plans for climate risk adaptation and resilience, their net-zero strategies, and their investment programmes

Transition Climate Risk Scenario

Follow members on the board of a fictional company grapple with strategic questions as it navigates through a world transitioning to a low-carbon economy.

Physical climate risk primer

Read our primer to enhance your knowledge and understanding of physical climate risk and how these could affect your company. It includes nine questions for the board to ask to help it respond and strategise. It was produced in collaboration with Acclimatise and MinterEllison for our members.

Organisations’ preparedness for climate change: An internal audit perspective

Read this Chartered Institute of Internal Auditor’s report for case studies, useful insights and tips to help audit functions begin their climate journey.

Confronting climate risk

This McKinsey article explores the kinds of physical changes that can be expected and the risks that come with them and looks at some of the choices most business leaders will have to confront.

Climate change litigation cases spreading around the world

This report reviews key global developments in climate litigation over the period May 2020 to May 2021.

Opportunity

There are opportunities which may emerge from successfully mitigating and adapting to climate change, including:

• Resource efficiency – more efficient modes of transport, more efficient production and distribution processes, recycling, more efficient buildings, reduced water usage.
• Lower-emission alternative energy sources – lower-emission sources of energy, supportive policy incentives, new technologies, participation in carbon market, shift toward decentralised energy generation.
• Products and services – development/expansion of low emission goods and services, development of climate adaptation and insurance risk solutions, R&D and innovation, ability to diversify business activities, shift in consumer preferences.
• Markets – access to new markets, use of public-sector incentives, new financial products such as underwriting or green bonds.
• Resilience/ability to respond to climate change – participation in renewable energy programs and adoption of energy efficiency measures, resource substitutes/diversification.

Chapter Zero energy guide

Our guide on smart and sustainable energy is designed to give non-executive directors an introduction to the steps they and their companies can take to reduce emissions from energy supply and use.

Curbing methane emissions: How five industries can counter a major climate threat

Methane accounts for about one-third of global warming. McKinsey research shows how five industries can cut emissions with proven technologies and at a reasonable cost.

Unleashing the sustainable business: How purposeful organisations can break free of business-as-usual

The Cambridge Institute for Sustainability Leadership summarises why a purpose-driven approach to business is the best route to create a durable, equitable and sustainable future.

Scenario analysis

Climate scenarios and consumer business

Scenarios describe what the future could look like, and are created to challenge conventional wisdom and drive better decisions. This report explores the futures of four different climate change scenarios and the science they are founded on. Consumer businesses face a complex web of climate-related risks and opportunities. The report, from Deloitte and the Met Office, illustrates how scenario analysis can aid effective decision-making.