Briefing for finance: Climate action
Climate change poses a significant risk to businesses, with potential for financial and operational disruption. However, addressing climate change also presents opportunities for innovation, resilience, and improved reputation. Organisations can mitigate these risks and capitalise on these opportunities by setting net-zero targets, developing transition plans, and integrating climate considerations into decision-making processes.
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OVERVIEW
Key facts
- 2.7°C is the median global warming predicted by the end of the century based on current climate policies.
- Emissions need to be reduced by 43% by 2030 to limit warming to 1.5°C.
- Over 130 countries and 795 of the world’s largest publicly traded companies have set net-zero targets.
- US$3.64 trillion has been lost due to climate change-related disasters in the last 50 years.
Climate action: progress so far
The Paris Agreement aims to limit global warming to below 2°C, with a target of 1.5°C. Despite this, current policies are predicted to result in a 2.7°C increase. The Intergovernmental Panel on Climate Change has declared a ‘code red for humanity’, highlighting the urgent need for action. Governments are responding with interventions such as mandatory greenhouse gas emissions reporting, corporate disclosure requirements, and transition plan development. The private sector is also taking action, with financial institutions committing to net-zero targets.
What are the risks to business?
Inaction on climate change has significant financial implications for businesses. Physical risks include damage to infrastructure and supply chain disruptions. Transition risks arise from changes in regulations and consumer preferences, potentially leading to stranded assets and increased costs. Market and reputational risks can also arise as stakeholders increasingly consider climate policies.
What are the benefits for business of taking action?
Organisations that take proactive climate action can benefit in several ways. They can prepare for regulatory requirements, align with customer and employee interests, and foster long-term resilience. Additionally, they can improve their reputation, develop innovation opportunities, participate in the value chain, and access finance through green and sustainability-linked financial instruments.
What action can finance take?
Finance teams play a crucial role in aligning corporate strategy with climate action. They can identify and assess climate-related risks and opportunities, set and operationalise net-zero targets, and report and disclose progress. They can also use carbon price in performance measurement, position management, investment decisions, strategy or risk management to embed the cost of carbon into business decisions.
