April 22 is World Earth Day, an important date to reflect on the importance of the planet as our home and the influence we humans have on it. On this day, it is crucial to consider the role of business in addressing the challenge of climate change, the main threat facing our planet.
Climate change will affect people and countries unevenly, concentrated mainly in those places where infrastructure and basic services are less well developed. In general, infrastructure will become increasingly vulnerable if changing climatic conditions are not taken into account in its design. According to the report of the Intergovernmental Panel on Climate Change (IPCC, 2022), between 3.3 and 3.6 billion people live in contexts that are highly vulnerable to climate change, which will affect their physical security and quality of life.
Globally, climate change is considered one of the main threats. The results of the World Economic Forum's (WEF) global risks report point to extreme weather events and lack of action to mitigate climate change as two of the top five risks for the next two years. The top four risks identified over the next 10 years are related to climate change.
In business, there is growing awareness of climate change and the need to take action. There are at least three approaches to how companies deal with the challenges of climate change: doing nothing as they consider it not to be a business issue; a risk management approach; and the third, an approach that combines risk management with the search for opportunities.
The first option is the possibility of adopting a passive attitude and continuing with business as usual. However, this passive approach carries risks, such as market loss, especially in more sophisticated markets that require greater commitment from companies. In addition, investors are increasingly considering environmental and social issues as part of their investment decisions, which could lead to higher capital costs for companies that do not adopt climate policies and strategies.
Under the risk management approach, companies identify risks and formulate mitigation strategies. Physical risk is the most obvious, as it originates from the immediate threats generated by climate change, such as the interruption of company operations due to natural phenomena that are becoming increasingly common. The second type of risk to be examined is transition risk, which is related to the potential cost to companies of adapting to changes in policies, laws and other regulations. A third type of risk is liability, which arises from failure to mitigate, adapt, disclose or comply with changing legal and regulatory expectations.
Identifying the risks faced by the company is the first step. Once this process has been completed, they should be analyzed internally and an effective risk management and mitigation strategy developed. Climate risks should be considered as core business risks, and their mitigation should be part of the overall business strategy, not an isolated element of the business activity.
Addressing climate change provides new business opportunities. The review of processes to reduce emissions or manage risks can identify "new ways of doing things", reduce the use of materials or energy, the same happens when analyzed from an adaptation point of view. There is also the possibility of developing products that contribute to providing solutions to the climate emergency by opening up new markets in which the company does not currently have a presence or by catering to sensitive consumer niches.
When we consider the complexity of the strategic decisions that companies must make, we understand that these decisions must start at the highest level. There is an opportunity to generate higher returns in the medium and long term, while identifying, evaluating and managing the current business model, and at the same time investing and transforming the business model with the medium and long term in mind.
This is not an automatic process; it requires a strategy that incorporates the elements of sustainability as an essential part of the business and the involvement and commitment of the different areas of the company. But developing products, revising processes, are characteristics of a culture of innovation, and climate change can enhance the development of this, and contribute to create competitive advantages that make us a better company.
