Corporate CEOs Can Leverage Climate Change Risks to Increase Business Success

Climate-conscious investors are increasing pressure on companies and their boards of directors to take action. Boards of directors that push back at their upcoming corporate annual spring meetings might be risking their companies’ competitiveness and value. Investment powerhouses—such as BlackRock and Vanguard Group—are pressing corporations to disclose how they prepare for future climate risk, and so are shareholders that can send proposals for a shareholder vote at annual meetings.

It is understandable that some companies are still hesitant to consider the risks of a changing climate on their business models. Their focus is optimized for shorter time horizons (e.g., 5-10 years) whereas projections of physical impacts of climate change have longer horizons and the timing of individual events cannot be predicted. However, long-term investors such as pension funds and asset managers have realized that the value of their investments is in peril if companies only wait to react when the next climate event strikes.

Adaptation Has Become a Necessity for Survival

Extreme weather events have been hitting the planet for millennia and insurance companies have been historically well-positioned to protect business from the associated losses. However, global warming is now increasing the frequency and intensity of such events. Under these circumstances, insurance has become more expensive and only offers limited damage coverage. Unless the world achieves greater cuts of greenhouse gas emissions than what is planned in the Paris Climate Agreement, climate change impacts will get worse and cost more.  

Guidehouse works with corporations on a climate-resilient journey to help them prepare for the future, manage risks, and realize new market opportunities. The following are the top five reasons companies are engaging in a climate-resilient journey:

• Avoid or minimize the costs from future disasters: In the US alone, the damages from extreme weather events such as droughts, severe rain and winter storms, cyclones, and wildfires cost $91 billion in 2018. In the same year, European droughts cost $7.5 billion, directly affecting the agricultural industry with crop failures and leading farmers to face bankruptcy. 
  

• Leverage new business opportunities: With every risk that climate change places in front of businesses, there are opportunities to develop solutions that create value. For example, Braskem, a chemical player in Europe and the Americas, developed a new line of resins when it faced the impacts of severe droughts and water scarcity on its power generation plants. Braskem’s new resins enable its clients to make lighter products with less energy and higher productivity, reducing their impact on water resources.
  

• Safeguard their current operations: Headquarters, production plants, the value chain, and companies’ staffs and customers all can be affected by the disruptive effects of climate change. This leads to value chain disruptions, operation break downs, cuts in productivity, and customer dissatisfaction. Safeguarding existing operations is an essential part of ensuring business continuity.
  

• Improve their competitiveness: Facing the risks of climate change means increasing businesses’ competitive edge. Mars Inc. is a noteworthy example, with its approach to climate impacts on its rice production. By 2030 Mars Inc. plans to procure over 70% of its rice from farmers that adhere to the principles of the Sustainable Rice Platform Standard (SRPS). This platform helps farmers increase their resilience to climate change. In 2017 alone, 96% of Mars’ rice was sourced from SRPS farmers. And scaling up a pilot in Pakistan yielded 30% reduction in farmers’ water use and 32% increase in farmers’ income. 
  

• Strengthen their corporate brand: Corporate climate action and sustainable operations add value to environmentally conscious customers and make businesses stand out from the competition. Acting on the four items above naturally leads to companies strengthening their corporate brands.
  

Since climate change has become a critical factor for business survival, boards of directors should develop a plan to determine the risks, identify opportunities, build resilience, and adapt. Investors are eager to see how these actions will turn into cost savings, market expansion, and revenue growth. It is now the responsibility of corporates to respond to the challenge and demonstrate leadership.