How can you anticipate climate-related risks and opportunities?

Sustainability and climate change are becoming increasingly important for organisations of all shapes and sizes.

From the perspective of the organisations’ impact on its environment, but also risks of the changing climate for the organisation. Think of:

Yet, in a report published by the World Economic Forum this year, we see that in the top-five of most likely risks and in the top-five of risks with the most impact, three of the five risks are climate related. This highlights the urgency for including these climate-related risks and opportunities going forward.

Where there are risks, there are also opportunities. Opportunities around:

How can you capitalise on these opportunities and prepare your company for the future?

What are the risks?
What are the opportunities?
What are the financial implications?
Questions you must answer?
Step-by-step plan for organisations

What are the risks?

The exact risks your organisation faces, depends on context, products, services and the business model. Generally speaking however, several types of risk may apply to your organisation. Climate-related risks can be split into two main groups, transition risks and physical risks.

TRANSITION

Transition risks are those risks related to the transition towards a cleaner, more climate positive economy. This includes the following risk categories.

Policies, laws and jurisprudence

Organisations are increasingly confronted with policies and laws related to climate. These can be aimed at accelerating the transition to a cleaner economy and, for example, stimulate organisations to emit less, to use cleaner energy or to process waste in a smarter way. A concrete example is the upcoming CO2 tax.

Recent years have seen a substantial increase in climate-related court cases against organisations, e.g. the current climate case against Shell. Cases have been made for not (timely) preventing an organisation’s negative impact on the climate, not anticipating (damages and loss through) climate change (think of extreme weather such as draught and floods) and insuffcient transparency about financial risks (e.g. to shareholders) following climate-related events.

Technological risks

Technological innovations related to the transition towards a cleaner economy, can also provide both opportunities and risks for operations. Think, for example, of renewable energy, storage of CO2 and hydrogen as fuel. When an organisation depends for a large part on ‘old’, polluting technology or fuel, for example in production or distribution, these new technologies can prove disruptive to operations.

Market risks

Changes in supply and demand can pose risks for organisations. What are your supply-side dependencies? You may face problems as a result of a reduction in the raw materials available or the failure of harvests due to extreme weather. On the demand side, there’s a reduced demand for products and services with a negative impact when it comes to sustainability. We see this both in B2B and in B2C business models.

Reputational risks

Social awareness around climate change, and the responsibility companies have to reduce their impact, is growing. If an organisation does not cater to this, they may face reputational risks. This could be through reduced demand, because consumers increasingly choose organisations that have a (more) positive impact on humans and on nature, or, for example because they find it diffcult to recruit and retain staff.

PHYSICAL

Physical risks are directly related to the weather and linked to climate change. These risks can be either incident-driven (acute in nature), or chronic (as a result of permanent, long-term changes in weather patterns).

Acute risks

Risks related to specific incidents, such as extreme weather conditions. Flooding or cyclones, for example.

Chronic risks

Risks that are related to changes in climate patterns, such as heat waves, drier seasons and higher sea levels.

Like with transition risks, physical risks often lead to financial implications for an organisation, such as damage to possessions or disruption in the availability of goods or raw materials, loss of quality or safety of employees.

What are the opportunities?

Where there are risks, there are also opportunities. Here too, specific opportunities for your organisation will depend on context and on the business model, but on the whole, opportunities arise in the following areas.

Efficiency and cost-saving

Innovations in the field of sustainability can lead to improved efficiency in, for example, production or distribution processes, but also within the organisation internally, through more efficient buildings, a better use of resources through recycling, or through the use of circular models. With potential cost savings as a result. The subsidies around sustainability also provide plenty of opportunities for organisations.

Positioning and reputation

Changing customer awareness is leading to changing demand. More and more organisations are acting on this by taking a position when it comes to climate change and improving the sustainability of their products, services and business models. This also helps them to become more attractive employers.

Market

Sustainable positioning creates market opportunities. By developing new business models, opening up new markets (think of governments who increasingly offer contracts to sustainable partners), and in raising new capital for organisations. These days, investors prefer to do business with an organisation that has a sustainable strategy.

Continuity

Ultimately, by adjusting business models to incorporate climate change, sustainability and impact, you will create opportunities for the healthy continuity of the organisation. There where others fail. Making your organisation future-proof ensures that you remain relevant in the market and for your clients, and that you are able to positively answer the question: ‘Will my organisation exist in 10 years’ time?’

What are the financial implications?

Management information often makes a distinction between financial information and non-financial information. Non-financial information relates to the key performance indicators (KPIs) related to people and planet, e.g. an organisation’s CO2 emissions, waste flows, HR and diversity policy. Such non-financial information is crucial for charting and anticipating climate-related risks and opportunities.

When it comes to organisational strategy, however, this distinction between financial and non-financial information does not make much sense: increasingly, climate-related risks and opportunities can have large impact on an organisation’s financial performance.

Questions you must answer?

What role will climate and sustainability play for your organisation and where should you start in order to include this in your organisational strategy? Relevant questions to answer in this regard are:

Step-by-step plan for organisations

1. Analysis of dependencies, risks and opportunities

2. Sustainability strategy

3. Monitoring and reporting

Monitoring KPIs and non-financial information to check on environmental performance and on progress of the strategy. This enables timely adjustments and allows you to quickly spot new risks and opportunities.