The effect of climate change on global supply chains, economies, and geopolitics are expected to keep on increasing, and so are the influences on organizations and their business. Organizations are directly and indirectly influenced and impacted by climate, however, these impacts can hold either risks and/or opportunities (transitional and physical).
For instance, around 3% of all extreme weather events were responsible for 60% of the losses in the past 40 years. Next to physical risks, transitional risks and opportunities, such as policy actions that lead to higher carbon pricing and technology risks, that result in improvements in innovation to support e.g. energy efficient economy can influence business operations as well as a company’s profitability. But to move to a low-carbon economy and remain profitable, companies need to understand what types of climate-related risks and opportunities are relevant to their business operations.
To help organizations identify their climate blind spots and understand their climate-related risks and opportunities, a climate-related risk and opportunity assessment is advised as a fundamental step. The assessment result will provide an organization with a holistic understanding of which parts of the business are affected by climate-related events, which presents risks and which holds opportunities and can assist them in setting targets and taking action to build a resilient business model. This article provides practical steps on how to go about a risk & opportunity assessment and shares best-case examples of how some companies are approaching it.
The assessment will quite possibly also highlight potential barriers and the download at the top of this article, provides helpful tips to overcome three TCFD implementation barriers and assist your organization in successfully aligning with the recommendations.
As a first target of the assessment, organizations are urged to select climate scenarios. Three possible climate scenarios are:
The best practice is to investigate at least two climate scenarios, as it will highlight, for instance, how the organization will be affected by extreme weather events through rising temperatures and how costs could increase due to carbon pricing, considering the different scenarios.
For instance, telecommunications company SINGTEL orientates itself on the climate-related scenarios based on Network for Greening the Financial System and analyzed the above three listed scenarios. Noteworthy is that SINGTEL connects its double materiality findings, including inside-out and outside-in perspectives to identify risks and opportunities related to climate change. Moreover, the company provides clear overviews of its physical and transitional risks analysis process and also explains its modeling process. SINGTEL applied qualitative and quantitate modeling, using internal risk reports and desktop research, and shows great transparency in its reporting overall.
As a next step, risks and opportunities should be identified. Involving stakeholders throughout the process is crucial, as it enables the identification of direct and indirect risks and opportunities. Although gathering the necessary resources that are needed to include various key stakeholders (e.g. risk and finance) can be a potential barrier, at the same time it gives companies the opportunity to develop a holistic overview of climate impacts (further explained in the download, Three Tips to Overcome Implementation Barriers available at the top of this page). Having an organizational governance structure in place that allows the company to make climate-related decisions, is strongly advised more specifically having a person on executive level dedicated to ESG.
Two of the main elements (amongst others) that are substantial to understand which risks and opportunities are the most important, are:
For both of these steps, company data, desk research, and expert opinions are required. Gathering the necessary data can be a potential barrier for companies, which could be addressed by giving the data-gathering responsibility to one or two assigned people. Discover additional advice on how to overcome this barrier in the download accompanying this article, elaborating on how to address this specific challenge.
Learning from how other companies identify their risks and opportunities and specify the implications of it to their business, could also be very helpful for your organization.
Diageo, a leader in alcholic beverages, considered three different climate scenarios: low warming 1-2°C, intermediate warming 2-3°C, and extreme warming 4-5°C. They then explored the impact on its directly owned assets, agricultural raw materials, and water-stressed sites. They focus on these three impacts, as they are directly connected to their business model. Moreover, Diageo investigates its assets and agricultural raw materials in Scotland and North America since they represent half of the net sales value globally.
Additionally, water stress is measured for their global operations since water is the main element of their products. Overall, the company set a clear focus on its value chain and geographical regions. However, the company decided on a cut-off, excluding the assessment of its agricultural raw materials in the 2-3°C scenario and for water-stressed sites in the 1-2°C, missing the opportunity to identify their impact on water-stressed sites when moving to 1-2°C.
Another example is Nestlé: the company assessed its most critical raw materials (cocoa, coffee, dairy, palm oil) as well as its direct operations as part of its physical assessment. Nestlé has therewith focused its assessment around what is the most relevant. The company also explored its transition risks which have the largest impact on its business aside from policy (e.g. price increase in raw materials) and market changes (e.g. increase in the cost of decarbonization due to high demand for carbon credits).
Although the company states to include opportunities in its assessment, no details are described in the report. Furthermore, the company is not elaborating on its stakeholder engagement process for its TCFD process and neither stating information about what type of data is used for their risks and opportunity assessment, also missing an opportunity to increase their reporting transparency.
The next suggested phase in the TCFD journey, according to Finch & Beak's TCFD roadmap is quantifying the impact of climate scenarios and risks and opportunities on a business per time horizon. This will be explored and explained in the next article of this series.
At Finch & Beak, our purpose is to accelerate sustainability within the business of our clients. Together with our fellow companies from SLR Consulting, we offer a wide range of TCFD support services:
If your organization requires support with implementing the TCFD framework, reach out to Gijs-Jan Groeneveld, at email@example.com or call +31 6 28 02 18 80 to discuss how Finch & Beak can assist you.