By Dr Andrew Coburn, CEO and Founder of Risilience
There is an intricate and complex relationship between climate change and the global economy. In the age of climate disruption, leaders of business organisations, CFOs, CEOs and senior decision-makers, need to understand and quantify the potential effects of climate-related risks on their organisations to be able to prioritise and address them effectively.
The risk landscape
Climate-related risks present a range of challenges to business. Physical risk resulting from climate change, such as sustained heatwaves, floods and wildfires that can damage key assets and disrupt operations and supply chains, poses a longer-term threat to business.
Near-term transition risks are emerging from society’s decarbonisation; climate-related litigation, investor pressure, changing consumer sentiment, technology and evolving policy, will impact companies over the next five years. This risk is significant. Risilience analysis shows that companies that fail to respond to climate change during this timeframe could lose up to 30 percent of their business value, while the global risks associated with climate change will escalate.
This sobering reality should leave many CFOs with important questions to answer and urgent actions to take. Ignoring the financial consequences of climate risk is no longer an option.
Data is key
On the upside, there are also climate-related opportunities for organisations positioned to meet them. Astute business leaders recognise both climate-related risks and opportunities, but what are the actions required to mitigate risk and optimise commercial opportunity?
Data is the lifeblood of this task and provides a valuable and verifiable asset that can be measured and monitored.
Developing an effective strategy requires establishing the financial picture across a number of ‘what if’ scenarios over short, medium and long timeframes to understand and prioritise risk – and plan the most efficient and effective response. For example, knowing the locations where suppliers are procuring raw materials, and the global hot spots where it will become harder to do so as climate change progresses, is crucial to informed decision making.
Taking a data-led approach to strategy offers lines of sight across the entire business operation and enables business leaders to financially quantify climate-related risk. Flowing data back to a group-level assessment of overall progress towards de-risking a company’s climate risk and preparing for new opportunities, and then passing that transparency on to investors and regulators can only be good for business.
Developing the agility to respond to the information data provides is also key. Businesses that can adapt their information systems to give early-stage feedback and respond accordingly will more likely experience success.
Turning transition risk into opportunity
A good business strategy isn’t limited to avoiding climate-related risk. Acknowledging that change and uncertainty are unavoidable components of the global business landscape, and maintaining the agility to deal with change, will keep a business relevant and even ahead of the field.
Reading changing consumer sentiment and adapting a business to meet new expectations is crucial. A recent NielsenIQ study found 78 percent of US consumers care about a sustainable lifestyle, and there are signs that this trend is being seen at the checkout. As the effects and awareness of climate change spread, consumer support for sustainable products is likely to grow. Companies that take early action to develop climate-resilient and sustainable strategies can unlock new opportunities and gain a competitive edge.
The convergence of finance and climate
The role of CFOs in mitigating the financial impact of climate change cannot be overstated. They must be proactive in addressing the challenges of tomorrow while capitalising on the opportunities available today. By taking a data-driven approach, CFOs can assess the potential risks their organisations face and develop robust strategies to navigate the uncertain terrain ahead.
Quantifying climate risk enables CFOs to make informed decisions, identify potential vulnerabilities, and allocate resources wisely. The power of data analytics and modelling tools allows businesses to evaluate the financial implications of various climate scenarios, helping them to understand the range of potential outcomes and prioritise actions accordingly.
The financial world recognises the importance of climate-risk assessment. Regulatory bodies and investors are demanding greater transparency and accountability. By integrating climate risk into their financial strategy, CFOs can build trust, enhance stakeholder confidence, and attract responsible investment.
CFOs need to harness sophisticated analytics and expertise in climate risk quantification that deliver insights to make informed decisions that safeguard the organisation’s financial wellbeing and lay the ground for a sustainable future.
Businesses cannot afford to underestimate the financial consequences of climate change. By quantifying these risks and seizing the opportunities available, CFOs can steer their organisations toward a prosperous, low-carbon future and maintain relevance in a fast-changing business environment.
