Climate change is increasingly being recognized as a major risk to businesses. The physical impacts of the environmental disaster caused by climate change, such as extreme weather events, sea level rise, and droughts, can disrupt supply chains, damage infrastructure, and impact operations. In addition, the transition to a low-carbon economy presents risks and opportunities for businesses, as governments and consumers demand more sustainable practices. As a result, it's important for companies to evaluate their exposure to climate risks and opportunities. This can help them identify potential threats to their business and take steps to mitigate them, as well as seize opportunities to innovate and create value.
Climate analysis: business evaluation
Identify Business and Climate Risks
The first step in evaluating climate analysis is to conduct a context analysis, in order to understand the business and the sector in relation to the linked climate risks.
This can involve assessing the physical risks that the company faces from climate change, such as the potential for flooding or storm damage to infrastructure, as well as the transition risks associated with the shift towards a low-carbon economy, such as changes in consumer preferences or government regulations.
Assess Materiality
Once climate risks faced by the business are assessed, it is necessary to conduct a Materiality Analysis.
The concept of materiality refers to the significance of the risks and opportunities in relation to the company's overall business strategy and financial performance.
An evolution of the concept has come with the introduction by GRI of the concept of Double Materiality. The European Commission introduced the concept of 'double-materiality' in their Guidelines on Non-financial Reporting: Supplement on Reporting Climate-related Information in June 2019.
This concept encourages companies to consider materiality from two perspectives: first, the extent to which information is necessary for understanding the company's development, performance, position, and its impact on the company's value. Second, it considers the environmental and social impact of the company's activities on a broad range of stakeholders. The concept also emphasizes the importance of assessing the interconnectivity of these two perspectives. While the second component of double-materiality has been applied in various ways before the term was introduced, it has always been a crucial consideration for businesses.
To assess materiality, factors such as the size of the company's operations in high-risk areas, the potential impact of climate-related regulations on its operations or supply chain, and the extent to which climate change is likely to affect demand for its products or services should be considered.
Analyse Risk Management Strategies
Another important aspect to be considered is the company’s risk management strategies. This involves assessing the effectiveness of the company's existing measures to mitigate climate risks, as well as identifying areas where further action may be needed.
For example, a company might have implemented a decarbonization strategy to reduce its greenhouse gas emissions (GHG), but may need to improve its resilience to physical risks, such as flooding or drought.
Evaluate Disclosure and Reporting
Finally, it's important to evaluate a company's disclosure and reporting on climate risks and opportunities. The process involves assessing the quality and transparency of the company's reporting on climate-related issues, as well as considering how carefully the company communicates with stakeholders about its climate strategy. Reporting activities are aligned with international standards and regulations such as the GRI and the CSRD, while an example of a standard guiding a climate strategy is the Net Zero Standard by SBTi. Good disclosure and reporting can help investors and other stakeholders to make informed decisions about a company's exposure to climate risks and opportunities, as well as hold the company accountable for its actions.
Conclusion
Doing a company's climate analysis, evaluating the exposure to climate risks and opportunities, is an important step in managing the risks and opportunities associated with climate change.
By identifying and assessing the materiality of climate risks and opportunities, analyzing risk management strategies and evaluating disclosure and reporting, companies can take proactive steps to manage climate-related risks and seize opportunities to innovate and create value.
