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To mitigate climate risks at the pace needed to create real change, corporate and government leaders must fundamentally shift the way they approach their risk strategies to address climate change challenges.
While finance leaders can, and should, play a crucial role in driving this change in corporate opinion, skepticism has held them back. To push the business community to evaluate climate risks, we must first stop the debate around climate change. Climate science is a legitimate field, and the findings are indisputable.
As we enter a new decade, the finance industry needs to correct climate change myths that businesses and governments have been using as excuses for lack of action. To accomplish this, we must start by acknowledging them.
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While climate myths come from a variety of sources and range in believability, four, in particular, have infiltrated the business world.
Myth 1: Climate change costs will not disrupt the economy. Finance leaders understand that economic factors drive most business decisions. So, the underlying belief that there is a lack of evidence to support the economic impact of climate change has hindered many companies from not only developing risk management strategies but also financially disclosing those risks.
However, scientists have found a direct correlation between climate change and the global economy. A continued increase in temperature of 0.072 degrees per year could cause a 7.2% cut to GDP per capita worldwide by 2100.
Investors are also investigating the relationship between climate change and the economy. According to a forecast analysis from the Principles for Responsible Investment (PRI) initiative, the decreasing cost of renewable energy and electric vehicles (EVs) will cause drastic shifts in how the world sources power and transportation, which in turn will force businesses to fundamentally change how they operate. As a result, investors predict that climate change will not only disrupt the economy, but it will actually benefit bottom lines as day-to-day operations become cheaper and more efficient.
Moving past the hypothetical, climate disasters are steadily increasing, causing insurance costs to rise and making business operations more expensive. For instance, as seen by the uptick of wildfires throughout the United States and Australia, businesses must understand how natural events will affect their operations and take the necessary steps to minimize losses.
Myth 2: Climate-related risks are systemic and too complex to assess at the business or industry level. On the opposite end of the spectrum, some believe that climate risks are inevitable, and that individual corporate action won’t prevent a hit to the economy. In fact, only 21% of CEOs currently believe that businesses are effectively contributing to global climate goals.
In reality, climate change will create winners and losers. Those that continue to display a negative mindset will suffer, while those that take proactive steps to assess climate-related risks will minimize the disruption of extreme weather events on their business costs. Finance leaders must report on climate risks and advocate for scenario analysis, which is a forward-looking assessment of risk used to predict problems and identify possible solutions to prepare for an uncertain climate future.
This type of analysis and financial disclosure is not complex. The Task Force on Climate-related Financial Disclosures (TCFD) has developed a robust guidance to conduct scenario analysis, from materiality assessment for climate-related risks to the evaluation of business impacts and potential responses. Reporting on these risks will help protect a company’s bottom line, while also acknowledging that corporate climate action will help reduce the economic impacts of climate change.
Myth 3: Climate projections are not accurate or reliable. This myth centers around the central concept that the lack of bipartisan agreement on climate forecasts implies that climate change is not a viable threat to the global economy. However, while there may be partisan debate around climate change, those arguments are unfounded. Climate scientists have proven that climate change is real and happening rapidly. Globally, nine of the 10 warmest years on record have occurred since 2005, and 97% of climate scientists agree that humans caused this increase.
Instead of debating the theoretical, business leaders must be action-oriented and focused on what can be changed now, not in 10 to 20 years. Operating with a forward-looking mindset can lead to inaction and the creation of hypothetical, versus actionable, climate goals. Business leaders must focus on what they can change right now to make their companies more sustainable.
Myth 4: Efforts made by businesses and cities are negligible and undermined by the lack of government policies and clear economic signals to decarbonize the economy. This last myth places all responsibility on the public sector, as some believe that significant change at scale cannot happen without political intervention.
However, the private sector is responsible for the majority of GDP and job creation, so companies need to take ownership of their impact on the environment, while working with the public sector to accomplish change. Collaboration is key to developing climate-related issues such as waste management, city design, electrification, and disaster preparedness.
While a global coalition may not happen anytime soon, local coalitions in city regions and even at the state level are feasible and can have a huge impact. One study found that international climate coalitions have the potential to reduce global emissions from 21 to 18 gigatonnes of equivalent carbon dioxide by 2030. It’s never too early to begin collaborating on climate change, and partnership will help both cities and businesses reduce their environmental impact while also positively impacting their local, and eventually global, economy.
As advisers to the C-Suite, finance plays a strong role in debunking climate myths and advocating for sustainability transformation. This change starts with reporting on climate risks and acknowledging how they could negatively affect company performance.
Overcoming these myths will allow organizations to operate in a transparent and action-oriented environment, where all parties are working towards regenerating the earth, while also regenerating the global economy.
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