With the Paris agreement on the books, it’s time to look at how climate change AND its mitigation will impact businesses, and how they can adapt.
As 2015 comes to a close, we can look forward to starting a new year with a global climate change agreement that has been signed by 95% of the world’s governments. We’re equipped with a multitude of reports that parse all of its endless details. But the deal leaves many companies with a big question: how can they continue to grow while cutting their environmental impacts in line with the new climate goals?
Several businesses have attempted to answer this question, but most have acknowledged that they won’t be able to significantly grow their efforts without strong policy support. With this in mind, it’s clear that the focus of business and governments must now shift from advocacy and cheerleading to implementation, whether that involves true funding of new product innovation or rolling out localized plans for sustainable development.
…the initiatives outlined in the Paris agreement are estimated to cost $16.5tn by 2030.
As we head into 2016, climate change news will likely recede to make room for other headlines. But the initiatives outlined in the Paris agreement – which the International Energy Agency estimates will cost $16.5tn by 2030 – are likely to emerge as a critical tool for companies. Among other things, they will enable planners to align their growth plans, assess their product portfolios, refine their innovation pipelines, redefine their key performance metrics and take stock of all the programs and processes needed to address these changes.
Hand in hand with these programs and processes is a big elephant in the room: cost mitigation. The White House projects that the incremental costs of an additional degree of warming will reach $700bn by 2030. And that’s a recurringyearly cost, not a one-time penalty.
Companies will likely bear the brunt of this expense. With that in mind, here are five key considerations to help clarify the breadth of the scope of this change – and how it is likely to affect business:
What can a global temperature rise of 1.5-2C mean for businesses?
A recurring theme at COP21’s business events was the growing awareness of climate science. Whether the people talking were CEOs, energy professionals or NGOs, they all displayed a rising consciousness of the impact of global warming.
Companies looking to weather climate change need to address this problem in scenario planning. They must ask where their suppliers live and operate, and what will happen to those regions if business continues as usual – or, alternately, if regulation intervenes.
Companies need to weigh whether it would be cheaper to find new partners or work with their current ones on adaptation tools and technologies.
They need to weigh whether it would be cheaper to find new partners or work with their current ones on adaptation tools and technologies. They need to address customer behavior and consider whether it will shift based on resource availability, weather conditions and new lifestyles. For those in the service industry, this translates into the need for a lot more knowledge. For example, accountants must brush up their sustainability accounting standards, doctors must weave sustainability elements into the science of healthcare and cleaners must understand what components go into the products they use and what impact those can have on the environment.
Many of these service professionals will also need to address the issue of how best to continue to grow their businesses without harming the environment. For a bank, law firm or brick and mortar store, this could mean understanding how opening more branches, stores and offices could improve access for communities but potentially hurt the local environment through increased emissions caused by infrastructure, transportation, waste and other factors.
What is the potential cost of climate change?
From the dangerous levels of pollution in Delhi and Beijing to the haze in Indonesia and the water crisis in California, we’re already seeing financial impacts from climate change. These costs will extend across a range traditional economic indicators. For instance, warmer winter temperatures on the US East Coast are costing retailers money in sales of cold weather gear. Further south, Miami is facing serious infrastructural issues as its sea level rises – and, in response, it’s creating innovative financing models to tackle situations in which traditional funding won’t suffice.
Accounting for these unintended costs will give companies greater predictability and a surer path to growth, but doing so will also require broadening the scope of their accounting sheets and potentially attaching a price to every resource they consume. Some companies, like Microsoft, are already leading the way by adopting internal carbon pricing. (Microsoft says its program has reduced its emissions by 7.5m metric tons and saved it $10m per year.)
How will climate change impact a company’s valuation?
The financial services sector is refining its investment criteria and strategies to address climate change, and companies should take note of how these evaluations can impact their stock performance. It’s hardly coincidental that Goldman Sachs and Citi both recently updated their respective environmental and social risk management policies to prominently incorporate climate and other environmental, social and corporate governance (ESG) factors into their investment strategies. For that matter, it’s hardly surprising that Citi has also decided to reduce its coal lending.
…the trend towards embedding ESG metrics into investment criteria will continue.
With six of the largest US banks calling for a strong climate agreement earlier this year, chances are the trend towards embedding ESG metrics into investment criteria will continue. To successfully adapt to this change, companies will need to get their investor relations teams in the same room with their sustainability teams, risk management teams and their boards.
Do employees understand how climate change links to their business?
Amid a tsunami of news and information, awareness of the impacts of climate change is growing and deepening. Educating employees about the specifics of how climate change will affect their jobs will require consistent and deliberate outreach, opportunities for engagement, and informal and formal conversations at all levels.
It will become vital for workers to understand the links between planetary boundaries and a company’s product portfolio, between their decisions and the company’s future, and between consumer behavior and the company’s pipeline – same as above. They will need to understand how every element of their work can impact the natural environment and resulting social conditions.
Do different departments talk to each other?
For companies hoping to adapt to climate change, communication between departments is vital. The investor relations team needs to connect with the marketing department so that they can communicate more cohesively on issues including ESG disclosure, sustainability stories and stock performance. The board of directors needs to link up with the chief financial officer so that corporate governance and business accounting stay aligned with new scorecards and demands for transparency – and so the CFO understands and recognizes these metrics of business performance.
The same goes for corporate philanthropy: it needs to move from a linear, foundation-led activity to one that aligns with the company’s business strategies. Doing so could help ensure that all of a company’s efforts – the sum of its collective action, including business and philanthropy – lead to clear, tangible impact on the world’s social and environmental conditions.
As for decision makers, they need to understand how climate change could impact their companies’ procurement policies and market growth so they can consider how best to adapt their companies’ structures and processes to these changes.
[blockquote]For many companies, it’s time to reach for a scratch pad and start plotting a new course.[/blockquote]There’s a lot more to dig into of course, based on a company’s sector, industry, ambition and appetite. However, the inevitability of climate change has never been clearer. It’s no longer a question of if climate change is going to happen or why a company needs to prepare, but when it is coming, what its impacts are going to be and how a company plans to adapt. For many companies, it’s time to reach for a scratch pad and start plotting a new course.
This article was originally published on the Guardian website.
Aman Singh is a journalist, communicator, social media strategist and CSR/sustainability professional. She currently works at Edelman as the VP Business + Social Purpose Practice. You can follow Aman on twitter @AmanSinghCSR