Climate risk disclosure can help companies create competitive advantage

Climate risk disclosure can help companies create competitive advantage

By Caroline Fouvet

Businesses across all sectors will be affected by climate change. Corporations, from Starbucks to Google, will be affected by climate impacts that can disrupt their supply chains and damage their physical infrastructure. However, comprehensive climate change adaptation assessments and strategies are infrequently considered as part of companies’ business plans. As suggested by Professor Michael Porter, the perception of “an inevitable struggle between ecology and the economy” leads some companies to be wary of environmental regulations, often viewing them as expensive procedures that lie outside of core business planning.

Professor Porter, however, disagrees and claims that there is a complementary relationship between environmental protection and business.  He argues that companies that pay attention to environmental risks are likely to be more competitive. The ‘Porter hypothesis’, formulated in the 1990s, is still relevant today especially with the implementation of disclosure policies on climate change–related risks gaining traction.

In July 2015, France introduced mandatory climate disclosure requirements as part of its law on “energy transition for green growth”. Institutional investors must now report on how their investment policies integrate climate change considerations, and where applicable, climate risk management. This was followed the following year by legislation passed by the European Union’s parliament targeting pensions funds and requiring them to include climate change in their investment strategies. Climate disclosure requirements could help companies to be prepared for emerging climate risks and increase their resilience.

Furthermore, in 2017 the Financial Stability Board’s Task Force on Climate-related Financial Disclosures published its final recommendations to help companies disclose climate-related risks and opportunities. Following the release of these recommendations, a group of 16 leading banks is participating in a UNEP Finance Initiative project, co-lead by Acclimatise and Oliver Wyman, that is developing a methodology for the banks to help them strengthen their assessments and disclosure of climate-related risks and opportunities.

Although the businesses are becoming increasingly aware of climate risks to their operations, there remains plenty of room for progress. For example, even though the insurance sector is particularly vulnerable to climate-related risks, its business strategy does not shield it from the impact of climate change. A study shows that many assets are becoming uninsurable, leading to an estimated US$ 100 billion ‘protection gap’ – the difference between the costs of natural disasters and the amount insured.

Assessing the impact of climate change on investments and adapting business strategies accordingly can help businesses save money in the medium-long term. For that to happen, it is up to governments to implement disclosure requirements. For companies it is important to pre-empt such regulation, and take early action to reduce climate risks to both core operations and supply chains.

Cover photo by Dan Schiumarini on Unsplash.

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