The biggest companies in the world have awakened to the fact that climate change is going to dramatically alter their businesses, including their bottomlines, a new report by CDP (formerly the Carbon Disclosure Project) has found in its analysis. The report, Global Climate Change Analysis 2018, provides climate-related information disclosed by companies. This includes financial impacts due to global warming, such as extreme weather events that can disrupt supply chains or regulations that can affect investments in non-renewable energy.
Much of these disclosures are due to a mix of internal pressure by shareholders and external pressure from regulators and consumers, who are demanding information on the business risks and opportunities associated with climate change. In 2018, 6,937 companies reported through CDP. The report analysed two groups of companies: 1) all of those disclosing through CDP in 2018, and 2) a smaller subset of 500 of the world’s largest companies by market cap.
The report found that these companies potentially faced $970 billion in climate-related costs in the next coming decades, which can start materialising in the next few years unless they take preemptive measures. Also, at least $250 billion of assets may need to be written off or retired early. 51 per cent of the responding companies identified potential climate-related opportunities as well.
53 per cent of the companies identified climate-related risks that are divided into two categories: physical risks, such as extreme weather patterns and rising global temperatures, and transitional risks, such as potential legal and policy changes. The number of transitional risks identified were almost double the physical risks.
Some of the key findings are:
- Governance: A positive correlation is seen between board-level oversight and management responsibility for addressing climate impact, and a company’s commitment to action.
- Strategy: 72 per cent of companies say they now integrate climate risk into their overall business strategy. Approximately half of the companies were asked to report on their scenario use (3,397 companies), with 42 per cent replying in the affirmative and another 1,138 stating that they intend to do so in the next two years.
- Risk management: For 54.5 per cent of companies, processes for identifying, assessing and managing climate-related issues are integrated into their risk-management processes. This is important to ensure that climate-related aspects and risks do not remain isolated in the CSR/sustainability division but becomes a company-wide issue with legal, risk and financial implications.
- Metrics and targets: Companies need to disclose the metrics and targets used to assess and manage climate-related impact, including calculating its emissions and reporting progress against set targets. Almost half or 3,610 companies reporting to CDP say they have an absolute and/or intensity target in place, though only 67 per cent disclosed sufficient data for their emissions-reduction targets. Of those companies, more companies set intensity than absolute targets (1,058 versus 874), probably because the former is easier and makes more sense from a business-growth perspective.
The report reveals that it is cheaper to manage climate-related risks than to respond to them when they actually hit. This is clear from the disclosures from 192 of the world’s largest 500 companies who reported both their potential financial risks and the costs to manage them.
Some of the risks mentioned by companies are increased rainfall and flooding in Southeast Asia that can impact Hitachi’s suppliers, and frequent droughts that may hurt the ability of Banco Santander Brasil’s borrowers to repay loans. Alphabet Inc., Google’s parent company, noted that rising temperatures could increase the cost of cooling its data centres.
The full report can be read here.