Key climate themes businesses need to focus on in 2023
As 2022 ended the international community was making promising—albeit small—steps to deliver a framework for fighting the environmental emergency of climate change and more explicitly addressing biodiversity loss. While COP27 did not live up to its billing for a climate change “implementation plan”, the parallel COP15 summit saw politicians sign up to the “30-by-30” proposals for protecting biodiversity by committing to designate 30% of the earth’s land and seas as protected areas by 2030. Meanwhile the European Commission (EC) and the Securities and Exchange Commission (SEC) signalled their intent to make firms more accountable for their supply chains both in regard to their climate and nature impact, and also to clarify their dependence on the environment. The coming year is likely to see more of such statements, reporting standards, and frameworks being agreed.
So, what will this mean for firms? The answer will obviously depend on how proactive a business has been in considering nature and climate change. All firms are on a journey, with some further ahead than others. That being said, there are four key steps that we believe all firms must take in 2023.
Understanding how markets could change as economies transition to a low-carbon world
The transition to a low-carbon world will not benefit all economies equally, some industries and regions will experience very different pathways to others. There will be winners and losers. Recent research by Oxford Economics and Arup values the green economy opportunity at $10.3 trillion by 2050. But businesses will likely not share such benefits unless they take significant steps. For example, carbon-intensive industries exposed to increased carbon prices and border adjustment mechanisms will fail to thrive without taking measures to reduce their risks.
Building an insight into how the global economy may change over the coming decades—and the likely impact on them and their sector—will be essential for firms to start the long-term planning they need to do now for sustainable success in the coming years.
Comprehending your firm’s impact on the world
All firms, no matter how big or small, have an impact on the world around them beyond what takes place on-site. Buying inputs from suppliers creates supply chains that span the globe, stimulating economic activity in industries and countries far from the firm itself. In turn, this activity sustains jobs, creates emissions, and uses raw materials and energy. Taken together, this represents the firm’s economic and environmental footprint that can be explored at both the aggregate level and on a detailed micro-scale—to the level, for example, of “how much greenhouse gas emissions are generated by farming in Australia due to our purchase of steel in Japan?”
Measuring and knowing where your footprint is represents the first step in moving your firm towards low-carbon operations. How can you reduce something that you do not measure or understand?
Identifying dependencies and risk
To be successful, companies must understand the economies within which they operate; climate risks bring a new dimension.
A major positive from investigating your firm’s footprint is that not only will you know your impact on the world, but you will also know your dependence on it, and the risks that your firm may be exposed to. This encompasses not only the physical risks that may be present in your operating locations, but also the transition and physical risks that are found throughout supply chains. The impact of some of these risks may be immediate, but others may be more long-lasting. For example, flooding may cut off transport routes and disrupt just-in-time production, drought may reduce yields in agriculture and place greater regulatory burdens on water-intensive industries, and carbon mitigation policies may lead to increased costs being passed down the supply chain. Exposure to risk leads to vulnerabilities in the supply chain which can be identified, and the potential impact measured, prepared for, and thereby mitigated, thus increasing expected resilience in an uncertain future.
The SEC and EC have indicated companies will be expected to start meeting new reporting standards imminently, while IFRS has added sustainability metrics to its widely adopted reporting standards. This year will also see the ratification of the Taskforce for Nature-related Financial Disclosures (TNFD). Often viewed as the bigger sibling of the Taskforce for Climate-related Financial Disclosures (TCFD), TNFD will move beyond TCFD’s focus on climate exposure to see firms report how they interact with the natural world, and the potential implications of climate change and biodiversity loss on their activities. And identifying dependencies and vulnerabilities is central to fulfilling these proposed reporting and disclosure requirements.
Scenario analysis for effective management in an uncertain future
As highlighted previously, knowledge of your firm’s place in a changing world means you can act to better manage exposure to risk, identify new opportunities, reduce your environmental footprint, and improve the sustainability of your firm’s activities.
Given the levels of uncertainties, exacerbated by the extended time horizons involved, it’s important that businesses gather the depth, breadth and quality of information necessary to identify all possible impacts and outcomes for the time periods involved and consider and evaluate all possible responses. Yes, there is a need to act fast, but instead of knee-jerk reactions to events and policy changes, good scenario analysis will enable businesses to be proactive over the long as well as the near term. This is especially so for organisations with particularly complex and sticky supply chains.
Conclusion
The two summits at the tail end of last year have given a clear signal of the direction that policymakers are taking across the world. As regulations and incentives to tackle both climate change and the threat to biodiversity intensify, firms must make better use of information and advice to ensure they can exploit the potential benefits and avoid the threat of losses. Only by re-aligning their supply chains and business operations can companies deliver the sustainable outcomes that will be essential to protecting the climate and natural world.
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