The climate change footprint in the profit and loss account
Climate change is not an ecological issue pointing to a distant future. It is a reality, with major economic repercussions on the bottom line of companies. In the world of the globalized economy, the cause/effect chain can be much more unpredictable. Thus, the drought in the Panama Canal translated into 15 million dollars in losses due to measures to reduce cargo to ships. The drought in Brazil has led banks to prepare for the more than imminent bankruptcy and inability to repay loans from local companies. These are just examples, but the situation ahead makes a radical change in business philosophy necessary.
If we look for concrete data, BIDInvest points out that 215 of the 500 largest corporations in the world could face more than a trillion dollars in costs related to climate change unless they take early action.
This is what the big consulting firms indicate and is included in the Disclosure Insight action (CDP) study. The report analyses the responses of companies in 2018 and focuses on the company’s vision of the risks and opportunities that can face climate change and its possible financial implications. Some concrete conclusions from this study:
- 25% of the companies that identified the risks as “important” only focused on legal aspects and not on those of markets, reputation or technology related to climate.
- Most companies are only assessing the potential physical and transition risks that could affect their direct operations, but they do not take into account the risks that affect their supply chains and customers.
From these data it appears that we have a very limited approach to risk, especially in light of changes in technology and market dynamics in certain sectors. CDP therefore encourages investors and companies to take note of these dynamics and expand their climate risk assessment practices if they wish to remain profitable in the future.
Good news: opportunities outweigh risks
51% of all companies surveyed also identified potential opportunities that could have a strategic impact on their business. Most of these opportunities are linked to new products and services that affect both the customer and the direct operating parts of the supply chain. Resource efficiency and alternative energy sources are the largest money-saving agents most frequently identified.
225 of the world’s 500 largest companies noted that climate-related opportunities represented potential financial impacts totaling more than $2.1 trillion. Most of this impact is due to the potential increase in revenues due to demand for low-emission products and services, as well as the possibility of a better competitive position in the face of changing consumer preferences.
If we look at Spain, and according to data from Ecodes and CDP in a survey involving 49 of the largest Spanish companies by capitalization, 41% of companies surveyed integrate climate scenario analysis in their business strategy. It should also be noted that 92% of participating companies have active GHG emission reduction targets. However, it points out that it is necessary to set more ambitious emission reduction targets that are recognised by the Science Based Targets (SBTi) initiative.
CDP ranks progress towards corporate leadership on climate change by establishing four stadiums:
1.- Disclosure, which measures the completeness of their responses.
2.- Awareness, how it evaluates problems, risks and environmental impacts in relation to the business.
3.- Management, how it has applied measures, policies and strategies to address environmental issues.
4.- Leadership, which recognises best practices.
Based on these, companies receive a rating ranging from “A” (leadership), the highest rating, to “D” (disclosure). Companies that receive an “A” (160 worldwide, including four Spaniards) get the highest scores in the three areas analyzed by CDP: climate change, water and forests. Twelve other national groups achieved an “A-“.
According to the survey, almost a third of the companies that provide their data to CDP have already set or are publicly obliged to set their emissions reduction plan linked to the objectives of the Paris Agreement. This figure will rise to 53% by 2020, reflecting the fact that these targets are a common market requirement for large companies internationally.
Cover image: Erich Muhr