By Vincent Manier, CFO at ENGIE Impact
2020 was set to be the year that climate change would take the spotlight on the world stage. Major companies like Microsoft and Delta kickstarted the carbon pledge trend, announcing aggressive targets to take control of their carbon footprint and setting an example to other companies. By March, however, COVID-19 had taken over as the biggest immediate threat to society and we saw the impact that global crises can have overnight, teaching the corporate sphere invaluable lessons about risk mitigation. The European commission has forecast a deep recession, with the UK economy alone set to shrink by 10%. But whilst the pandemic has certainly made a dent in global GDP, climate change is estimated to make an even bigger impact, causing global GDP to decrease by 2.5%-7.5% by 2050.
While climate risk remains an often overlooked or undervalued factor in risk management programmes, there is an urgent need to integrate resiliency into core business strategy if businesses want to continue to thrive — or even remain operational. The current COVID-19 pandemic, specifically, has emphasised the importance of prioritising resilience by exposing the fragility of global supply chains and dysfunctional systems across businesses and forcing them to change the way they plan and operate to factor in large-scale crises. These learnings must now be applied to similar risk brought about by climate change;businesses need to prepare for the impact of devastating weather events on supply chains and infrastructure they rely on to remain safe and operational.
As key members of the financial team, risk managers need to grasp the implications of sustainability across the organisation, from strategic risks posed by new regulations to operational risks posed by extreme weather, and financial risks with regards to taxes and insurance. As we continue to fight climate change, understanding the strategic, operational and financial risks — and the tools available to assess and plan for them — will help finance teams take a more forward-facing approach to risk management and avoid repeating past mistakes.
Strategic risk and sustainability
There are four key risk factors associated with strategic risk and sustainability: economic changes, corporate responsibility, regulatory risk and reputational risk. From an economic standpoint, there have been major shifts brought about by decarbonisation and diversifying portfolios — consider the rapid decline of the coal industry, for example. In addition, companies are being held more accountable for their impact on the environment, with pressure coming from all sides, including customers, investors, competitors and regulators. Increased regulation and legal requirements around resource management and carbon reduction, as well as required carbon reporting, can result in major fines if not complied with. Finally, reputational risk, while hard to quantify, can be enormous, particularly in today’s political climate and as both internal and external stakeholders become more educated on the action against climate change.
Sustainability can also impact how businesses approach operations like supply chain optimisation, procurement strategies, data privacy and security. For instance, the finance team can make more informed decisions around power purchase agreements, on- and off-site renewable energy, decentralisation and microgrids, energy independence and cost savings opportunities when factoring climate risk into the overall procurement strategy.
There are also more direct operational risks to consider as a result of climate change in terms of extreme weather events, which continue to increase in both frequency and intensity. Businesses must account for the possibility of outages, damages and closures, all of which can threaten the ability to protect employees, assets and data centres (which can pose new risks in terms of data privacy and leaks), and ultimately to keep the business operational.
Financial risk factors
Climate change poses significant financial risks to an organisation, due to sustainability policies and corporate initiatives that can affect taxes, insurance, resource management, energy sourcing, investor support, and even intangible assets such as goodwill — for instance, the impalpable value that customers and investors place on a company’s ability to reduce its footprint. These financial risks are for the financial team to assess. There are also opportunities – for example, sustainability planning also opens the door to integrating new technologies to save money, such as alternative energy vehicles, which bring financial benefits all their own.
Integrating climate risk into new or existing risk management programmes can seem daunting, but there are strategic assessments that the financial team can leverage to make the process simpler. For instance, vulnerability assessments allow businesses to understand where climate change is most likely to affect them. Scenario assessments can provide a forward-looking view of the potential impact, so finance teams can plan ahead to mitigate future developments.
Financial teams are key in ensuring that businesses are adequately prepared for the next threat. Whilst recovering from COVID-19, improving resilience and mitigating risks associated with climate change should be a priority for those in finance, we need to learn lessons from the pandemic to ensure we’re prepared for when unexpected events occur once again. Armed with new tools and methods that will be develop along the way, we can strategically and effectively tackle for climate change, while ensuring businesses and industry have the resilience needed to weather any storm.