The four types of business risk from climate change   Leave a comment

What if the climate scientists are right? What if humans and the actions of business – especially the burning of fossil fuels – is changing the composition of the atmosphere and causing the Earth to warm?

Companies face four types of risk from climate change concerning direct physical impacts, or via regulation, reputation damage and litigation, which are more indirect in nature in that they concern the responses of society and governments to the way companies address, or don’t address, carbon issues and climate concerns.

Physical risk: companies may face the physical consequences of climate change, including the impact of weather-related events such as increased storms (eg. stronger cyclones, intense hailstorms) and floods (including storm surges and flash floods from intense rainfall). The number of droughts, strong winds, heat waves and forest fires are also expected to rise.  The CSIRO conducts analysis of the potential implications of climate change in Australia.

These disruptions to business life may mean the security of key infrastructure is threatened, employees aren’t able to make it on-site, or access to important inputs and resources are hampered.

Risks arising from the physical impacts of climate change were of significant concern to the majority of respondents (64%) in the Carbon Disclosure Project 2010: Australia and New Zealand report (CDP10)1.

Regulatory risk: climate change is seen as a serious market failure that can only be corrected by some sort of government intervention (see blog post: the economic thinking behind a carbon tax). As a result, legislators around the world are introducing regulation. In principle, regulation can be divided into two types, notably:

  • Traditional legislation, such as permits and energy-efficiency requirements for products and processes (such as the Energy Efficiencies Opportunities Act); and
  • Market-based regulation, such as carbon taxes, emissions trading schemes and fuel tariffs. An increase in both types of regulation is being prepared and implemented at an international, regional, national and local level.

Regulation is a powerful force for change. Government efforts indicate that companies around the world – whether directly or indirectly responsible for emissions – will be increasingly exposed to regulation.

In CDP10, 69% of ASX200 respondents indicated that regulatory requirements pose a significant risk to their company (however 76% of ASX200 respondents also considered there to be significant opportunities presented by current and/or anticipated regulatory requirements)2.  

Risk to reputation: a company’s reputation and brand are inherently linked to its overall value. Consumers are starting to pay more attention to the behaviour of business in response to climate change. Companies run the risk of a decrease in consumer confidence and brand value if they are perceived as failing to address climate change risks. They may also suffer a loss of reputation among other stakeholders such as the financial sector, governments, employees or the media (especially in the age of 24 hour news channels, Facebook, Twitter and LinkedIn).

On the positive, businesses may also find opportunities to positively differentiate themselves from their competitors by measures aimed at reducing their carbon footprint and developing new markets in low-carbon products and services.

Risk of litigation: increased legislation inevitably leads to an increased risk of litigation, such as:

  • Actions targeting heavy emitters;
  • Challenges related to emerging state and Federal carbon controls;
  • Scrutiny of GHG disclosure;
  • Greenwashing and the Competition Consumer Act 2010 (see blog entry: Green Marketing and the Australian Consumer Law)

1 Carbon Disclosure Project 2010: Australia and New Zealand, p35

2 As above, p31-32

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Posted August 29, 2011 by equilibrium in Climate Change & Sustainability

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