Climate change is a hot topic. Not only for citizens, but also for the corporate world. The Paris Agreement, and growing public and regulatory pressure, brought the matter to the top of the corporate agenda. Companies understand that managing the risks and opportunities arising from climate change now is crucial to becoming future-proof. However, this is not yet a majority.
Our company will not be hit by climate-related risks. In fact, many companies have already been affected by the impact of climate change. More frequent and severe weather events are damaging infrastructure and disrupting supply chains. The transition to a lower carbon economy comes with new policies, regulations and rapid changes to market dynamics, with consequences for companies in different sectors. Some oil and gas companies are already facing lawsuits over their contributions to climate change. In addition, some companies, like the chemical multinational company BASF, already faced a financial damage of EUR 250 million due to extreme drought. The drought affected the water level in the Rhine river so badly, that ships couldn’t navigate the river and BASF couldn’t use the river as a source of cooling water for chemical reactors.
Our company already has a sustainability plan. It is sometimes believed that having a sustainability plan and a net-zero target means the company is prepared for climate-related risks. This could be true if companies are active in a carbon-intensive industry, like oil and gas. Decreasing their emissions would not only be the right thing to do for society, their reputation and the reputation of their sector, it would also reduce the risk of having to pay higher operating costs as a consequence of a future carbon price or tax.
Our risk management department looks at all risks. These challenges make traditional risk management inadequate. Risk managers traditionally look at the likelihood and impact of an identified risk. Scenario analysis, on the other hand, can be considered a form of risk management, but it has distinctly different characteristics, especially regarding its long-term outlook (>10 years) and acknowledgement of the impact of volatile events. Scenario analysis allows companies to understand the climate-related risks relevant to their business and how they may evolve over time.
Climate change: we’ll see it when we get there. Companies don’t only need to measure their exposure to climate-related risks and subsequently manage them, but also incorporate them in their strategic plans. Failure to do so could undermine the sustainability and resilience of their business. If, as a company, you don’t make a decision about climate change, climate change will make the decision for you.
Taking actions on climate change only cost money. Let’s be clear: mitigating risks will indeed cost money but failing to act will be even more expensive in the future. The current debate however sometimes focuses too much on the risks. Not everybody sees the opportunities that will arise: innovation and technology development, new products, retaining talent and being seen as a leader. Acting now to prepare your company for climate change will definitely pay off in the future. It will not only help your company to unlock new market opportunities and create lasting commercial advantages, it will also help avoiding potentially catastrophic climate change in the second half of the century.
The excerpt was taken from the KPMG Thought Leadership publication entitled Five misconceptions about climate-related risks.