Business models must adapt to climate risks

Former deputy head of the Bank of England’s Prudential Regulation Authority Paul Fisher has made an emphatic remark: Climate change could trigger the world’s next financial crisis. This should ring alarm for the policy makers. Fisher has warned that sudden repricing of assets due to climate change could hugely affect businesses across the globe.
His comments come close on the heels of the World Meteorological Organization (WMO) report that the concentration of carbon dioxide (CO2) in the atmosphere averaged 400 parts per million (ppm) in 2015 for the first time on record. CO2 —the main greenhouse gas that causes climate change — had earlier crossed 400ppm on certain months in some locations, but never on a globally averaged basis.
Human actions have ushered in a new climate change era. And despite optimism generated by the recent global pacts on reducing greenhouse gases, phasing out hydrofluorocarbons and slashing airplane emissions, there is enough reason to believe that we have to do more if we want to save humankind from the impending environmental catastrophe — which will spark widespread havoc.
The businesses have to scale up their efforts towards transition to a low-carbon economy. Clean technologies and energy efficiency have to become the cornerstone of every corporate house. The UAE has announced that it will raise its clean energy target from 24 percent to 27percent by 2021. This is a landmark decision which qualifies for praise. The UAE has spurred low-carbon economy by giving boost to renewable energy sector in a big way. A strong coordination and deep understanding between public and private players in the industry will produce increased
impetus to green businesses.
A recent paper by the UK’s Cambridge Centre for Sustainable Finance exhorts financial institutions to improve the way they assess climate risks. If they make an assessment based on the long-term impact their activities cause on the climate, it would help them to fast-track their switchover to business methods that don’t use fossil fuels. Governments around the world are putting strict regulations in place for businesses. It would, therefore, be wise for the financial sector to ward off any material risk by investing in environmentally-sound trade practices.
The fallout of climate change on business operations will increase if the physical climate risks are considered in isolation. It is crucial that apart from damage to
facilities, reduced product demand, lost productivity and write-offs, the long-term rebuilding cost is factored in. Companies have to devise business models that can not just face climate challenges and risks but also adapt to them efficiently.
“Climate change is a genuine investment risk,” underlines Andrew Gray, an investment manager at AustralianSuper, a pension fund. Pouring in money to make businesses resilient to climate change is increasingly becoming a global imperative. Climate-impact perils can be curbed if businesses put risk assessment and mitigation at the heart of their policies. Every financial institution should have separate and comprehensive climate policy, which curbs the physical and product risks and ensures environmental sustainability. If a climate policy follows this line, it would be able to surmount the sudden system-wide repricing of assets.
As the frequency of extreme weather events increases and market volatility
becomes the norm, global businesses have to shoulder corporate responsibility of making a green transition. It’s a responsibility that will make societies cleaner and also help the businesses weather the storm!