Prepare

Understanding the risk of inaction from climate change

Understanding the risks climate change and potential climate policies pose to your core business and shareholder value will help you chart a path forward and manage possible negative impacts to your business and operations. The CDP estimates that climate change will put $4 trillion of assets at risk by 2030 (1).

There are two overarching risk categories to include in your corporate climate risk assessment: physical risks, and business and transition risks.

Physical risks: Risks to your company that may arise from the physical impacts of climate change, described in Figure 3.

Figure 3: List of Physical Risks. Source: TCFD (2), BCG analysis.

Global warming has already created physical risks to businesses across the world, and if warming is not halted, it will likely continue to expose your company to possibly greater physical risks. The increase in climatic events like wildfires, destructive storms, and flooding will undoubtedly lead to operational disruptions and cost impacts. Chronic physical risks, such as temperature increases, heat stress, sea level rise, and other gradual shifts in climate, could strain your operations and damage your company’s bottom line. Acute physical risks like hurricanes and wildfires can disrupt operations and supply chains as well. For example, the National Oceanic and Atmospheric Administration (NOAA) found that natural disasters in 2022 cost $165B across the United States, partially due to the increased intensity of such disasters due to warming (3). Additionally, the physical impacts of climate change have the potential to cause societal, geopolitical, and other economic risks as pressure is placed on natural resources and human systems, which will further impact your business operations.

Business and transition risks: Risks to your company that may arise from failing to transition to a low-carbon economy, described in Figure 4.

Figure 4: List of business and transition risks. Source: TCFD (4), BCG analysis.

Risks related to the transition to a low-carbon economy arise from potential regulatory action, technological shifts, market demands, and reputational matters. More details on business and transition risks can be found below:

Policy and Legal: For companies to stay ahead of the curve, they must not only adhere to existing laws, but predict upcoming climate regulation and their impact. Some 88% of emissions come from countries with net-zero commitments, and while not every country has robust regulations in place, it is reasonable to predict that regulatory environments will tighten in the coming years (5).Your company may miss out on funding opportunities from government subsidies and incentives, and may incur costs due to increased taxes (e.g., carbon taxes) and mandated emissions requirements (e.g., purchasing costly offsets). Additionally, with more countries cracking down on emitters, there is the possibility of regulatory action against companies if they are unable to curb emissions or mismanage climate strategy, among other sustainability concerns (6). Read more here: Deep dive: Understand.

Technology: New technological improvements and innovations that support the transition to a low-emission economy may supplant current norms. If your company does not optimize its existing business with lower emissions and sustainable technologies, it may fall behind on key technological developments, along with the new markets, business models, and cost savings that often accompany them. This will affect your company’s competitiveness and may leave it facing reduced demand for its products/services, stranded assets, and potentially higher costs to transition to these technologies later.

Market: A June 2022 BCG consumer survey found that while most consumers (less than 10%) do not purchase sustainable products solely to save the planet, a significant number (20-43%) would be willing to make sustainable choices if they were linked to other benefits, such as health, safety, and quality. Additionally, the number of consumers willing to make sustainable choices increases even further (to roughly 80%) when barriers such as convenience, information, and cost are addressed (7) (p10). Additionally, many B2B companies are feeling pressure from clients across their value chain that have ambitious net-zero targets. If your company does not develop climate-aligned offerings, it may experience market share loss, disappoint consumers, and miss out on pockets of new demand and growth opportunities.

Reputation: Investors are increasingly pressuring business leaders to focus on both climate resilience (the ability to adapt to climate impacts) and provide a clear decarbonization roadmap to contribute to necessary collective climate action, in line with the Paris Agreement. The Paris Agreement aims to cut global CO2 emissions 55% by 2030, limiting global warming to “well below 2, preferably to 1.5 degrees Celsius”. Many asset managers already integrate climate risks and actions into their investment process, framework, and portfolios. In line with these, financial markets will increasingly adopt carbon emission and climate risk-based frameworks to require disclosure and pursue investment decisions. Additionally, financial institutions are creating and joining initiatives aligned with net-zero action. For example, the Glasgow Financial Alliance for Net Zero (GFANZ), founded in 2021, is a global coalition of financial institutions designing tools and methodologies for such institutions to reach net-zero emissions (8). Additionally, entities throughout the value chain, including suppliers, business customers, and consumers, may have climate priorities of their own, and will potentially demand that the businesses they support meet sustainability standards/expectations as well. The sources of this stakeholder pressure vary depending on industry and region, but increasingly, taking climate action is necessary to create a “right to play.” To navigate and keep pace with these shifting priorities, your company will need to develop decarbonization and climate transition plans.