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Climate Change is Material

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How is climate change impacting your company? How does your company impact the climate? Few organizations can answer these questions, and for many, the response is, “we do not emit enough greenhouse gas emissions for our influence to be material.” This is precisely the question all companies need to consider, however, if they are to maintain business continuity in a changing climate and if the world is to have a fighting chance of limiting global warming to 1.5°C. 

Climate change must be on the radar of all companies.

Why climate is a priority 

Because our planet is at risk 

Climate change is real, with profound projected impacts to communities across the globe if emission rates continue at the same pace. According to the World Economic Forum’s Global Risks Report 2021, climate action failure is the most impactful and second most likely long-term risk. Several other significant global risks identified in the report include threats that climate change will exacerbate, such as extreme weather, biodiversity threats, infectious diseases, and natural resource crises.

Climate risks fall into two categories: physical risks and transition risks. Of the many anticipated impacts of climate change, perhaps the simplest to understand are the physical risks. Physical risks include extreme heat; increased frequency and severity of hurricanes and wildfires; and flooding, drought, and sea-level rise. These physical impacts are already having a cascading effect on other aspects of a functioning society, such as regulation, the economy, and human health; these are the transition risks. Companies across industries and geographies will continue to be faced with an array of physical and transition risks.

Because society expects more 

In the United States, climate change is one of the Biden-Harris administration’s immediate priorities. To achieve its goal of net-zero emissions by 2050, the administration seeks to create a unified strategy for tackling economic and environmental impacts of climate change. President Biden has set the expectation for a “whole government approach” to climate, which means all federal agencies are expected to contribute toward national climate goals. Although in its early stages, this climate action plan is the most expansive in U.S. history, with an anticipated focus on energy-efficient affordable housing and driving cost reductions in clean energy technologies.

Companies should expect increased federal attention to the corporate response to climate. Only a few months after the new administration’s climate pronouncements, the SEC established the Climate and ESG Task Force. The Task Force seeks to identify corporate misconduct related to climate and ESG matters, such as misstatements or material gaps in companies’ disclosure of climate risks. The Federal Reserve also has climate change top of mind. To improve the Federal Reserve’s ability to assess climate-related financial risks, the Supervision Climate Committee launched in January to facilitate the central bank’s strategies and focus on climate change risks and adaptation measures. Though neither has put any additional requirements on companies, these developments signify a dedication of resources to monitoring climate issues for the foreseeable future. 

Failure to act on climate also poses risks to a company’s reputation and ability to secure capital. Investors are forecasting severe impacts on capital markets resulting from climate change and calling on companies to increase their internal climate fluency. BlackRock CEO Larry Fink’s annual letter lays out this call to action most clearly of all: “Climate risk is investment risk.” BlackRock expects company leadership to demonstrate a strong understanding of company-specific transition risks and disclose climate information in a consistent and decision-useful manner. If they are not already, companies should expect more requests from investors for improved disclosure on climate-related risks and would do well to report against credible frameworks, such as the CDP (formerly the Carbon Disclosure Project) and the Task Force on Climate-related Financial Disclosures (TCFD).

Individuals have increasingly high expectations that companies act as responsible stewards of the current and future earth. In an Amnesty International survey of more than 10,000 young people, climate change was the most commonly cited important issue facing the world. While climate-consciousness is on the rise among consumers, it also plays an increasing factor in career choices and employee activism. The year 2019 saw a series of high-profile employee actions on climate, including more than a thousand Google employees signing a letter demanding that the company reduce its carbon emissions and upwards of 1,800 Amazon employees walking out in protest over the company’s inaction on climate change.

Because companies have influence

While many agree that governments must lead the way on climate, companies have a meaningful role to play. Many sectors and business activities contribute to global emissions. While some emit more than others, very few companies (if any) are carbon neutral by design. All industries rely on carbon-emitting activities to some extent. The energy sector, which includes energy use in industry, buildings, and transport, accounts for three-quarters of global emissions. Even if we could fully decarbonize our energy sources, it would still leave a not-insignificant 25 percent of emissions to tackle. There must be a coordinated and cooperative effort to reduce emissions across sectors. Business is well-positioned to advocate for, innovate, and implement solutions to tackle this challenge.

Climate change can be an opportunity

Companies that seek to preserve the status quo run the risk of missing out on the opportunities presented by a transition to a low-carbon economy. These include:

  • Lower costs associated with reducing energy consumption
  • Decreased impact of future regulations, such as a carbon tax
  • Improved likelihood of winning and maintaining customer contracts due to ability to help customers achieve their climate goals
  • Development of new low-carbon products and services
  • Differentiation from peers
  • Keeping up with or setting new climate-aware consumer preferences

Where to begin

The concept of climate change can feel daunting. For those companies who aren’t sure where to start, we recommend beginning with developing a holistic understanding of the company in relation to climate change by answering three questions:

1) What impacts does the company have that can and should be mitigated?

2) What climate risks will the company need to adapt to?

3) Where can the company create new value through its products and services?

For many companies, incorporating climate considerations throughout the organization will require new processes and new ways of thinking and working across the workforce. The C-Suite and the board must lead and champion this effort to ensure its success. 

Changing old ways of working is not easy. But the consequences of inaction are too high. Climate change poses one of the greatest threats to our world that we will ever see. Companies who fail to act are not only jeopardizing their future business continuity but failing to take advantage of perhaps the most significant opportunity of a lifetime.  

For more information on how we can help, contact Victor Melendez, Managing Director & Chief Growth Officer

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Faith Nicholas

Faith Nicholas

Faith is a Consultant at FrameworkESG and specializes in the firm’s materiality and assessment services. She enjoys using data, research, conversation, and a healthy bit of elbow grease to answer tough questions for her clients.