Climate-change-related financial impacts are closer than you think. While the worst physical effects are still decades away, some physical effects are already visible (e.g. South Dunedin floods) and through shifts in the cost and availability of key financial products (e.g insurance) these turn into financial risks.
At the same time, the transition risks are already evident.
Transition risk & opportunities come from the move towards the low-carbon economy, including regulatory response to Paris Agreement, and financial & insurance markets response. For example, Climate Action was voted #1 issue by NZ directors in an IoD survey before 2020. COVID-19 forced governments and organisations to expedite Climate Risk response: governments and industries have a chance to make the recovery green. This response speed-up comes through mandatory disclosures, carbon price, and investment funds reallocation:
Reporting: Traditionally, organisations (firms, government, local authorities) were monitoring what they do to the environment (e.g. via CO2 emission reporting as part of ESG disclosures). Investors and regulators increasingly expect organisations to identify, assess, manage and disclose what the environment does to organisations (and quantify the financial impact).
Carbon price: Pricing carbon will change the relative prices of all activities. This will make some profitable business models untenable—and it will also create massive new opportunities.
Re-investment: carbon pricing and new technologies will disrupt the current business models and create new ones, and mandatory reporting will facilitate transparency. This will lead to widespread investment reallocation, creating both winners and losers.
How can you ensure that your organisation adequately prepares for the future - especially in light of economy-wide changes?
How can you master the uncertainty of the coming change?
Invest in these elements:
To appropriately assess risk & opportunity in the environment of high uncertainty, when past data is not a predictor for the future, adopt Scenario Modelling as a new approach recommended by RBNZ and the investment community for this purpose.
To mitigate information asymmetries and externalities, invest in coordinating across multiple actors: businesses, local & central government, other bodies. For example, the US meat industry agreed that they would not compete on climate change, but instead act together collaboratively.
To adequately identify and leverage risks and opportunities, adopt a holistic approach to climate action: start educating directors on their emerging obligations in relation to foreseeable and material financial risks[1] and engage senior management in supporting their Board in meeting these obligations. At the same time, identify potential commercial opportunities, including how a better understanding of emerging risks from climate change can help with meeting the organisation’s strategic objectives. This will require cross-functional engagement and collaboration, but offers an opportunity for collective learning.
[1] Chapman Tripp. (2019). Sustainable Finance Forum Legal Opinion 2019. Auckland: Aotearoa Circle.