  Climate change is widely regarded as one of the most serious challenges facing the world today, with consequences that go far beyond its effects on the environment. Climate change has reached a tipping point in global awareness and in a relatively short period of time the dynamics have changed drastically. The issues have clearly entered the political and economic sphere, where businesses are also increasingly confronted with the implications of climate change and begin to recognise that it poses both risks and opportunities, with strategic and financial implications for their businesses.
The first step in assessing the effects of climate change on your business is to understand the full scale of potential risks and opportunities and develop a carbon management strategy. As such, it’s important to ask yourself the following questions: What does it mean for your company? What are the different types of risks and how prepared are we as business owners and global competitors for this risk? It has therefore become important to note the new climate change reality and how this can lead to a better understanding of what businesses need to do to ensure they are in line with best practice in this regard, and to ensure they are leading operators in this low carbon sphere.
It is critical to a business’s carbon management model to first identify the business risks associated with climate change and then, to plan for the risks that will have a significant impact.
Business Risks of climate change
According to a recent KPMG survey – ‘Climate Changes Your Business’ – four different types of business risks resulting from climate change have been identified. These can be described as; physical impact, regulation, reputation and litigation. Of these risks, the one physical impact is the risk most directly related to climate change where the others are more indirect in nature as they are concerned with the responses of people about how a company should or should not react to climate change.
Physical Risks: This type of risk is highly dependant on the location of the company and includes the impact of weather-related events such as increased storms, droughts, strong winds and heat waves that are becoming more and more prominent in today’s environment. However, companies are also affected by the longer-term physical risks such as water availability. The less obvious risks can be defined as the impact on the workforce, such as heat-related illness and enforced relocation of operations. While many companies may be protected from these risks through insurance products, they run the risk of new risks entering the private sector.
Regulatory risk: Climate change is certainly seen as a drastic market hindrance and as such, government has had to intervene by introducing climate change regulations and policies. These are categorised into two types: Traditional legislation – these include permits and energy-efficiency requirements, and Market based regulation – which include carbon taxes, emissions trading schemes and fuel tariffs. A steady increase in both types of regulatory risk is being driven of late and is considered a powerful force of change.
Reputation risks: The survey indicates that climate change will become a mainstream consumer concern by 2010. As such, should companies not comply with climate change policies and make a concerted effort to integrate carbon management into business strategies and processes they will lose consumer confidence and brand value.
Litigation risks: The function of litigation is to act as a catalyst for regulation, ensuring that companies that do not comply will be penalised. Litigation can be divided into three categories; actions targeting heavy emitters, challenges related to emergent state and federal carbon controls, and scrutiny of greenhouse gas disclosure.
Out of the four types of risk, studies show that 79% of companies focus mostly on regulatory risk. So the question remains, how prepared are companies for the risks they are faced with and what is the road forward for most?
Risk vs Preparedness
KPMG’s ‘Climate Changes Your Business’ survey assess the perceived level of these four categories of risks and the preparedness of 18 industry sectors to manage these risks of climate change.
The sectors are then classified as belonging to one of the three following categories
- danger zone – risk is markedly greater than preparedness,
- middle of the road – risk is matched to preparedness and
- safe haven – sectors appear to be reasonably well prepared and do not seem to face significant risks
The below graph indicates the risk that different sectors face:
It is important to note, however that this survey is based mostly on European and US reports and literature. The categorisation of South African sectors is likely to be different, for example the food and beverages sector is more likely to be in the danger zone. The Stern Review sums up some alarming prospects for crop yields in developing countries with increasing temperatures and possibilities of fish stocks in the sea depleting with higher acidification of the sea as a result of increasing CO2 levels.
Once climate change risks have been understood, what can companies do to minimise or alleviate the risk? Some organisations have already implemented carbon management initiatives, perhaps by measuring their carbon footprint and identifying the ‘low hanging fruit’ in terms of emissions reductions. However, an appropriate response requires more than this. Few organisations to date have adopted a structured approach to deliver lasting value. Many companies are not getting maximum value from their carbon management programmes, because they haven’t linked it to core business objectives.
Certainly, it is important for companies to understand the new climate reality to guarantee that they are committed and ready for the strategic change within their business. By this, they are better able to accommodate this real concept we are faced with globally.
The new climate reality
The strategies of successful corporations are increasingly shaped by environmental and socio-economic issues. Yet despite this recognition, ‘environmental’ issues such as climate change are rarely taken into account in the broad economic system. This represents a market failure that is likely to be corrected over time by a combination of international co-operation, regulation, technology promotion and market-based incentives. Therefore, the main challenge for governments is to develop an international framework which successfully levels the playing field and provides incentives for taking decisive and sustained actions. In addition, the challenge for business is to develop an integrated, long term carbon management strategy, using existing risk management processes and linked to core business objectives.
Companies that understand the new climate reality – and that are willing to invest in preparedness and risk management – are also best-equipped to seize the opportunities.
Shireen Naidoo is an Advisory partner at KPMG and is responsible for the Sustainability and Climate Change business unit. Her key areas of experience include sustainability reporting and health, safety and environmental (HSE) management. Prior to joining KPMG in 1998, Shireen was the HSE Manager of an international chemical company.
About KPMG:
KPMG is a global network of professional services firms providing Audit, Tax and Advisory services. There are over 123,000 professionals working in over 140 countries worldwide.
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