An evaluation of some challenges that climate-related risks will create for businesses and the officers controlling them.
Climate change has become one of the leading socio-economic issues for businesses to consider moving into the new decade. The increase in greenhouse gas and C02 emissions is evident as are the corresponding climate-related risks, which have been supported by scientific research. Global warming’s role in the melting of ice caps has led to global average sea levels rising 3 inches in the last 25 years. Furthermore, extreme weather events, including droughts, fires and storms, have almost doubled since recorded figures in 1980. Indeed, the Australian wildfires furthers these facts and shows that climate change cannot be ignored.
Public awareness of climate change has developed significantly over recent years. Fuelled by environmental pressures and protests, such as the Extinction rebellion movement, 2019 arguably saw climate activism become ‘mainstream’. Perception is shifting from organisations solely linked to fossil fuels, such as oil and gas, to a recognition that all sectors bear responsibility, including the financial industry.
The first truly globally binding treaty on climate change is sealed within the Paris Agreement 2015. This is arguably another attempt at a concerted effort towards a shared world target for climate change resilience. The Agreement commits international communities and authorities to hold global warming to no more than 2 degrees above pre-industrial levels. Development in eco-friendly technology and societal sentiment undoubtedly influenced these negotiations, however, companies of all levels are still unclear how any new eco targets will impact their business operating costs, the viability of products they serve and the future of their supply chains. Equally, the Paris Agreement offers no sanctions if a country falls short of the targets, so, arguably confuses businesses as mere ‘policy without teeth’.
Calls for action have not gone unnoticed by the UK government and regulators. The Climate Change Act 2008 set the foundations for the UK’s approach to tackling the issue. Laws have recently been passed amending the UK’s domestic climate change targets for a tougher and more ambitious goal of ‘net-zero’ greenhouse emissions by 2050. This commitment means the government hopes that overall carbon footprint will be reduced, and any emissions will be balanced by equivalent schemes and innovation to offset these gases from the atmosphere.
Additionally, given the UK has recently left the EU, there are opportunities for legislation. Suspected government plans of a Carbon Emissions tax are somewhat likely to be introduced within the coming years, to replace the EU’s Emissions Trading System. It is rumoured this will touch and concern a wide spread of taxable corporations from large publicly trade companies to high street businesses. Furthermore, Parliament is currently reading drafts of the Emissions Reduction Bill. This aims to place provisions for air quality in affected zones within legislative footing, which will be enforced by fixed penalties for offences under this Bill. While this shows initial steps made for clearer laws and sanctions, any timetable for new measures coming into force cannot be predicted. The lack of any stable policy environment makes it challenging for businesses to plan and take decisive action with certainty.
On top of the growing public outcry, banks, creditors and financial investors are increasingly sceptical of the ‘carbon footprint’ of companies they invest in. Legal & General echoed this sentiment by making it the ‘top of its investment agenda’ and has since divested funds away from companies that fail to act on climate change risks. Equally, RBS has recently announced its ambition to become ‘climate positive’ by 2025. They will work on this through their financing activities, namely, cutting funding to businesses that emit large amounts of carbon dioxide or where more than 15% of its activities relate to fossil fuels. As a result of climate risks, the finance sector is transforming and reallocating capital towards more currently attractive and sustainable opportunities that promote environmental, social and governance (ESG) objectives.
For businesses, a review of corporate governance and social responsibility should be placed at the top of the agenda. Preparing strategies against climate risks is no longer exclusive for the environmentally, or simply image, conscious.
While it is arguable that pubic and listed companies will feel greater scrutiny from stakeholders, clients and regulators, all businesses will be urged to report on their environmental impact in the future. It is clear, from the UK government at least, that authorities will crack down on companies and their officers for failing to take adequate responsibility towards the nation’s ‘net-zero’ target. Organisations that can set targets and demonstrate how they manage risks offer a more favourable profile to the public and the wider business world.
While there is still much uncertainty, it is undeniable that climate change is creating further challenges for business moving forwards in the form of litigation, corporate governance and regulation. Climate change risks are real and ignoring or not taking proper advice may lead to significant consequences.