The rising climate change poses a serious threat to global economic stability. Companies must prepare for potential impacts on their industries, infrastructure, and overall operations. By investing in decarbonization strategies, companies can anticipate and mitigate the economic risks associated with climate change.
Two categories of risks that can impact businesses are distinguished:
Physical risk (direct), represented by tangible events related to rising temperatures.
Transition risk (indirect), represented by disruptions induced by the transition to a low-carbon economy.
This article focuses on the major categories of physical and transition risks and how a company should establish a framework to map such risks.
PHYSICAL RISKS
The materialization of physical risks, such as natural disasters, can lead to significant financial consequences for investors. Damages to infrastructure and real estate directly affect business performance.
There are three categories of physical risk :
Acute risks from events like natural disasters, which may increase in frequency and intensity;
Chronic risks resulting from long-term changes in climate patterns and rising temperatures;
Acute and chronic risks are now fully integrated into companies' risk mapping processes, reflecting the growing need to consider and manage these threats to ensure business resilience and sustainability.
Their relative quantification depends on three factors: the company's location and assets, sector/positioning sensitivity, and adaptation capacity. The goal is to categorize and compare the financial and extra-financial impacts of these risks to prioritize concrete actions to mitigate their potential impact.
Transition Risk
Transition risks arise from efforts to limit greenhouse gas emissions in line with climate agreements such as the Paris Agreement. These efforts require economic restructuring towards low-carbon production and consumption models. Public policies, such as emission pricing, impose costs on economic and financial actors. Companies aligned with these low-carbon trajectories may be advantaged, while non-compliant companies face a risk of value loss.
There are four categories of transition risks that can impact a company:
Regulatory and Legal Risks:
o Linked to policy changes, such as the establishment of a carbon price or stricter regulations, both to mitigate activities contributing to global warming and to promote adaptation.
o They also encompass the increase in litigation resulting from losses and damages caused by climate change, with a trend towards a rise in strategic legal cases aiming to establish jurisprudence on the links between climate change and human rights.
Technological Risks: concern innovations and technological disruptions favoring the fight against climate change, such as new renewable energy technologies, energy storage, and carbon capture.
Market Risks: result from changes in supply and demand due to the increasing consideration of climate risks, leading to fluctuations in commodity prices, among other factors.
Reputation Risks : Stem from changes in the perception of clients and stakeholders regarding an organization's contribution to climate issues.
Transition risks can lead to profound changes in an organization, with short-term investments yielding long-term benefits.
To maintain the trajectory established by the IPCC of staying below 1.5 degrees Celsius, it is crucial for companies to consider these risks as major elements to integrate into their organizational strategy, directing their investments towards low-carbon initiatives.
We will address the quantifiable benefits for a company investing in an active decarbonization strategy in a forthcoming article.
ABOUT APOLOWNIA
Apolownia is a mission-driven company committed to making a significant impact in the climate sector.
We support businesses and funds willing to engage in long-term and impactful decarbonization strategies - within and beyond their own value chain - by designing, implementing and monitoring science-based carbon reduction projects that restore natural ecosystems.
Through technology and innovative solutions, we aim at shaping a resilient and environmentally friendly world, by encouraging the decarbonization of the economy and supporting social and environmental initiatives.
You can drive positive change for the climate, biodiversity and local communities.
Contact us to engage or for more information. Find us on www.apolownia.com.
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