Climate Change and Your Business: Identifying and Prioritizing Material Risks
Companies are increasingly recognizing the impact a changing climate will have on their bottom line but struggle to understand and prioritize climate risks within the context of their business. This blog unpacks the concept of material risks and provides a framework to help you navigate the world of climate threats.
What are Material Risks?
Publicly traded companies are required to disclose (publish for shareholders) any information that is “material.” The U.S. Securities and Exchange Commission (SEC) defines “material” information as a fact that a reasonable investor would consider important when making an investment decision. This definition inevitably includes matters that significantly impact a company's operations, financial position, reputation, or legal obligations, fluctuating stock prices, and disruptions in your supply chain. The focus of reporting a material risk is to demonstrate to your investors that you understand the risk, have established a priority to that risk, and are appropriately monitoring and managing the highest priority risks.
When it comes to climate change, global reporting frameworks have split material risks into two categories:
Physical Risks: These are the direct impacts of climate change, such as extreme weather and climate events (floods, droughts, wildfires), rising sea levels, and increased frequency of hurricanes, typhoons, and tornados. These single events and chronic weather changes lead to property damage, disrupted operations, temporary or permanent relocation of workers, and increasing the likelihood of health and safety risks to your workforce.
Transition Risks: These impacts are caused by our societal and global shift to a low-carbon economy. Think government regulations on carbon emissions, changes in consumer preferences, and the rising reputational cost of relying on fossil fuels. Transition risks can make existing business models obsolete, lead to stranded assets, and create new opportunities for those who adapt.
Identifying Climate Threats
The first step to managing climate risk is understanding how it applies to your specific business. Here are some questions to consider:
Location: Where are your facilities and operations located? Are they in areas vulnerable to extreme weather or rising sea levels?
Supply Chain: How reliant are you on suppliers in regions susceptible to climate impacts? Could disruptions affect your ability to produce or deliver goods?
Resources: Does your business rely on water or other resources that could be impacted by climate change?
Regulations: How might future climate change regulations affect your industry or operations?
Prioritizing Risks
Once you've identified potential threats, you need to prioritize them. Here are some factors to consider:
Likelihood: How probable is it that the climate threat will occur?
Impact: How severe would the consequences be for your business if the threat materialized?
Vulnerability: How well-prepared is your company to manage and bounce back from climate and weather-related disruptions?
By analyzing these factors, you can allocate resources effectively to address the most significant climate risks facing your business.
Taking Action
There are several steps businesses can take to mitigate climate risk, here are a few:
Invest in resilience: Fortify infrastructure, diversify supply chains and implement business continuity plans.
Reduce emissions: Transition to renewable energy sources, improve energy efficiency and adopt sustainable practices.
Advocate for change: Support policies that promote a low-carbon economy and climate adaptation.
By proactively identifying, prioritizing, and addressing climate risks, businesses can ensure long-term sustainability and success in a changing world.
Avoiding Greenwashing Guide
Accusations of greenwashing aren't just a hit to reputation; they present a new area of measurable and material financial risk for companies. It's about ensuring your statements aren't just words but are rooted in accuracy, transparency, and backed by credible evidence.
Download our guide which will introduce you to evaluating your marketing, communications, and report materials for greenwashing.
Click here to download our Guidebook.
The Uplift Agency
Uplift builds strategies, programs, and communication campaigns that advance ESG in workplaces, supply chains and communities.
We know how to navigate the road ahead because we’ve already been down it – 90 percent of our team has led environmental or social programs in corporations or nonprofits. Because ESG is all we do, our services are more comprehensive and integrated than most firms.
