See your climate blind spots

With a plan in place to reduce carbon emissions, a company’s climate strategy is largely complete - right?

Business leaders who have been working hard to decarbonize their operations may be surprised to hear that they may have climate risk blind spots. But if leaders have not considered all the ways a changing climate could impact their business, they could be failing to see big risks. All companies are potentially exposed to climate impacts – even companies with low or no carbon emissions. And the impacts are coming sooner than many leaders think. In fact, they are already here.

Let me share a brief story about one company that uncovered its climate blind spots. Like many other firms, this global conglomerate had committed to sharply reducing the carbon emission intensity of its operations. But when the company’s leaders took the time to look more closely at how a changing climate could affect the business, they made important discoveries. Leaders realized that global heat stress could increase the cost of raw materials. Worse, the company faced huge potential revenue losses from customers hit by extreme weather events. These risk calculations were based on a relatively conservative assumption about global warming – less than 2°C. And these risks weren’t far in the future. They could become reality this decade.

The company’s risk analysis identified opportunities too. Leaders learned they could create vast new global revenue streams by adding weather-resistant product lines.

This company’s story is an example of how forward-thinking firms are now managing their climate strategies. These companies are defining clear pathways to decarbonizing the business – that is, they are managing their impact on the climate. But these firms are also focusing on the other part of the equation: the climate’s impact on their business.

What climate impacts should companies be concerned about? Start with the direct impacts of climate change itself. Floods, droughts, fires, and increasing heat are already disrupting economies and communities across the world. Forward-thinking companies are mapping the risks to their full value chains across different warming scenarios. This analysis can reveal some surprises, especially for companies in lower emission sectors that may have assumed their firms to be less exposed. For example, a global telecommunications company mapped the potential impacts of hurricanes, wildfires, and floods on its operations. A chemicals company quantified the potential impact of carbon taxes on its business.

As PwC’s Global Chairman Bob Moritz observed, it’s a rare business that has no offices, plants, or people in affected areas; no upstream suppliers or downstream customers exposed to a changing climate; no reliance on natural resources or ecosystems; and no vulnerability to climate-driven political instability, resource shortages or economic downturns. Business leaders should think now about how their companies will operate in a world in which, as The Economist says, “overshooting 1.5°C of warming now seems all but certain.” Companies that map these risks now can proactively manage them – and use them to spot opportunities.

Climate impacts don’t stop at direct physical effects. Climate change is also reshaping the operating environment for business, spurring a shift toward a low carbon economy with increasingly loud calls for change from governments, regulators, investors, and the public. Though society’s transformation will be rocky and uneven, the direction of travel is clear.

Firms need a clear plan for navigating a disruptive societal transformation and redefining the business model for a low carbon world. Penalties are increasing for those firms that don’t. For instance, global standards are emerging for climate risk reporting, underpinned by the Taskforce on Climate-Related Financial Disclosures framework. Companies will need to disclose their full climate risks such as direct climate change impacts, reputational damage, stranded assets, adverse policy changes, rising costs, resource shortages, or even displacement of a company’s entire business model. The US Securities and Exchange Commission (SEC) has proposed new rules to require disclosure of climate risks’ material impact on a company and its financial statements. Disclosures like these will be studied by investors, lenders, and insurers, and will affect companies’ credit ratings, valuations, loan terms and insurance rates.

Companies should prepare for non-linear acceleration in these climate-driven impacts on their business. As Harvard’s Rebecca Henderson noted, it’s been hard to price climate risk because its effects haven’t been very visible, but this is rapidly changing. Climate change’s effects are becoming more obvious, and our ability to model these risks is improving too. For example, some financial institutions are developing better and better models to gauge clients’ exposure to drought risk. The stage is set for what Mark Carney, former governor of the Bank of England, says could be climate risk’s “Minsky moment” – a sudden, widespread realization of the true magnitude of climate risk, potentially leading to abrupt drops in asset values for exposed companies.

PwC’s 2022 CEO survey revealed evidence that these tipping points are already happening. For example, the CEO of a major real estate firm told us: “It is financially unattractive to try to decarbonize many buildings… The speed with which financial institutions are declining to finance those buildings – and investors are deciding not to buy them – is amazing.”

Of course, the flip side of risk is opportunity. Companies that act now to understand their climate change risks will be best positioned to pivot in ways that protect their long-term success.

Here’s what to do. Remember that a company’s climate agenda should not stop at decarbonizing its operations. Companies should look out and beyond the company walls, taking a holistic view of how their company will survive and thrive in a warming climate and a low carbon economy. Leaders should understand how a heating climate and a transitioning economy will affect each part of their value chain, and ask themselves tough questions about how their company will find its place in a low carbon world. With this analysis in hand, companies will be better positioned to get ahead of the risks and opportunities brought by a profound global climate change whose speed of advance may well surprise us.

Business has a societal opportunity – and responsibility – to be a proactive part of the solution to one of the biggest challenges to living generations. Companies should help lead the way in building a low carbon, climate-resilient economy that helps all people thrive. This is good for business, and good for the society on which it depends.