Assess Other Climate-Related Risks and Opportunities
Environmental Defense Fund
As you assess your company’s environmental impact, it is important to consider risks and opportunities beyond greenhouse gases (GHGs). By taking a holistic approach to climate risk management, businesses can better prepare for the potential impacts of climate change and ensure their long-term resilience and success.
Beyond greenhouse gas (GHG) emissions, your company should be thinking about and preparing for other climate-related risks and opportunities. Topics such as materiality and climate justice and equity are important to consider as you assess your company’s place in a low carbon future.
Several tools and frameworks can help you think though your company’s climate-related risks and opportunities more broadly. In particular, the Taskforce on Climate-Related Financial Disclosures (TCFD) takes a holistic approach to disclosure, recommending 11 separate disclosures across strategy, governance, risk management, and metrics and targets. The TCFD also recommends scenario planning and analysis, through which you can document assumptions and run through possible risks and opportunities based on how your company operates now and in the future. The topics considered below, including materiality and climate justice and equity, are important considerations in TCFD disclosures and your operations broadly.
Materiality
Materiality is an accounting concept used to determine when data is relevant and significant. Single materiality looks at how a company is affected by sustainability, while double materiality also looks at how a company is affecting the environment and society. Materiality has several use cases, including reporting, corporate strategy, decision making, and risk assessment. Within sustainability, this typically is used to assess climate risks that could have a significant impact on a company’s financial performance or reputation.
Focusing on materiality risk assessment for sustainability, risks can be physical or transition related, and may include things like increased insurance costs, loss of market share due to changing consumer preferences, or regulatory changes that increase the cost of doing business. For many companies, these risks are becoming increasingly important as investors, customers, and regulators demand greater transparency and action on climate change. As such, it is important to identify and assess risks related to climate change and develop strategies to manage them effectively.
Physical Risks
Physical risks refer to the direct impacts of climate change on business operations, infrastructure, and assets.1 These risks can include damage to buildings and equipment from extreme weather events like hurricanes, floods, and wildfires. Physical risks can also impact supply chains, transportation networks, and other critical infrastructure, leading to disruptions in production and distribution.2 To address physical risks, you need to assess your company’s vulnerability and invest in resilience measures.
Transition Risks
Transition risks occur as your company, and society, transitions to a low carbon future. These risks can arise from policy, legal, technological, and market changes due to climate change that could impact the profitability and viability of business. Some examples of transition risks include the following:
- Policy and regulatory risks: Policy and regulatory changes, such as carbon pricing, emissions trading, and renewable energy targets, can have significant business impact. These changes can lead to increased costs, reduced competitiveness, and reputational risks for businesses that fail to adapt. Also, government regulations can change rapidly in response to climate change, and businesses that are unprepared or noncompliant may face fines, penalties, or other sanctions.
- Legal risks: Companies that fail to manage their climate risks could face legal action, particularly as stakeholders become more aware of the potential impacts of climate change. These lawsuits may come from stakeholders, customers, or governments, and can be related to issues such as emissions, product liability, and human rights violations. This could lead to litigation, fines, and reputational damage.
- Technological risks: As the world transitions to a low-carbon economy, there may be rapid technological advancements in renewable energy, carbon capture, and other technologies. Businesses that fail to adapt to these changes may face technological risks, including stranded assets and decreased competitiveness.
- Market risks: Climate change is leading to changes in consumer preferences and behavior, as well as shifts in demand for goods and services. Businesses need to assess their exposure to changing market conditions and adapt their business models and strategies accordingly.
- Reputational risks: As climate change becomes a more significant issue for stakeholders, businesses that fail to manage their climate risks could face reputational damage. This could impact customer loyalty, employee recruitment and retention, and access to capital.
- Supply chain risks: Changes in climate and weather patterns could impact global supply chains. Your company needs to assess its exposure to supply chain risks and develop strategies to ensure resilience and diversification.
To address transition risks, your company needs to assess its exposure to carbon-intensive activities and develop strategies for transitioning to a low-carbon economy.
Climate Justice and Equity
Climate change disproportionately affects marginalized communities, and businesses that fail to consider the social and environmental impacts of their operations may face reputational damage or legal action.3 As stakeholders become more aware of the importance of climate justice and equity, companies that fail to address these issues may be seen as negligent or unethical.
To address climate justice and equity, your company needs to engage with local communities and stakeholders to understand their concerns and priorities. This could involve implementing measures to reduce negative impacts on local ecosystems and communities, as well as investing in sustainable development initiatives that promote social and economic equity. Look at how you can integrate climate equity considerations into your sustainability strategy so that you can not only reduce risks to the company but create opportunity for local communities.