Expand beyond Net Zero targets, or pay the price - how can enterprises become climate intelligent

Every organization in every sector, in every part of the world, is facing varying degrees of climate risk – and that risk is escalating as climate change accelerates. In 2021 alone, extreme weather events caused USD329 billion in economic losses – 45% higher than the 21st-century average. These catastrophes are increasing in frequency and severity. In the coming decades, the impacts will be felt globally: a report from McKinsey warns that of the 105 countries it assessed, which represents 90% of the world’s population and 90% of global GDP, all “are expected to experience an increase in at least one major type of impact on their stock of human, physical, and natural capital by 2030.”

Accelerating climate change is placing acute pressure on organization leaders from a wide range of strategic, financial and operations angles. Direct losses and financial impacts are already widespread through asset damage and supply chain disruptions, with global economic losses projected to hit USD23 trillion by 2050 under current climatic conditions. Regulatory pressure from emerging climate disclosure requires risk to be quantified and integrated into enterprise frameworks. Increasingly, pressure will come from an array of stakeholders such as B2B partners, shareholders, insurers and financial institutions for clear risk management strategies and transparent climate metrics.

Forecasting, quantifying and adapting to climate-related risk will be an essential capability to protect any organization’s bottom line. To date, efforts to address climate change have been focused on decarbonization strategies, but reaching Net Zero will not protect an organizations assets from the physical impacts of extreme weather events already being experienced. Nor will it ensure a smooth material transition to a low-carbon future. C-Level leaders must consider the full picture of climate risk - a picture that must include managing asset-level physical and transition risk alongside Net Zero Targets.

To go beyond Net Zero targets, design effective strategies and make effective decisions on organizational climate action leadership must be able to access and assess a unified view of their climate risk, that includes physical risk as well as incorporating carbon management, and transition risk. This information must be decision-useful, translating complex science into actionable insights Physical and transition risk are the tangible impacts of climate change each with its own drivers, challenges and consequences for organizations. Physical risk includes the floods, heatwaves, wildfires and droughts that are becoming increasingly frequent, widespread and volatile in our warming world while transition risks derive from the shift to a decarbonized future. Importantly for organizations, physical risk, as well as transition risk, is also a key aspect of climate-related regulatory reporting that will need to be disclosed as a mandatory requirement.

Taking climate action and tackling climate risk can seem like a daunting task. However, alongside the material risks that must be addressed, becoming more resilient through climate intelligence also offers businesses strategic and competitive advantages and opportunities:

Comprehensive climate action increases customer value, so many organizations are looking to partner with companies they know focus on, enable and support credible sustainable practices. With investor and customer preferences shifting, companies that don’t adopt mitigation and adaptation measures are more exposed to reputation risk. Taking a long-term view, climate-informed investments are a better bet for allocating capital and more likely to have enhanced return. The flip side of the coin is avoiding investments that may not pay-off in the long-term, for example writing-off stranded assets.

Another strategic advantage of taking climate action is the cost reductions from becoming more energy efficient, reducing water consumption, sourcing locally, reducing shipping costs etc. Being prepared for climate hazards can avoid or minimize operational disruptions, reducing associated costs and losses due to business discontinuity. For existing assets, businesses can use CI to decide whether climate resilience would be best achieved by retrofitting, retiring or relocating them depending on the exact hazards, risk level and relevant timeframe. With many businesses retrofitting assets to meet decarbonization targets, combining Net Zero and adaptation retrofits at the same time can provide significant cost savings. Taking these actions now can help organizations avoid operational shutdowns where the direct and indirect impacts of climate change lead to business operations being no longer profitable.

Climate intelligence is a critical enabler of data insights and solutions that can bring competitive advantages to the company, and feed into multiple operational workflows. The first step is to make climate intelligence and adaptation an active agenda point at the board-level, ensuring board-level oversight on the financial implications of physical climate risk and how the organization is managing that risk. The business case for doing so is clear: according to the Global Center on Adaptation, “Adaptation actions, done right, are some of the most cost-effective investments a country, city, or company can make.” While ‘Chief Climate Officer is not yet a C-suite role, being climate-informed is absolutely essential to any C-suite role that involves the integration of people, processes and technologies across the company and with oversight of multiple decision-making flows. A climate-informed board, supported by regular reporting on climate-related issues will be key for facilitating strategic, climate-informed decision-making .

The second step is to review the decision and workflows across multiple functions in an organization and identify where climate intelligence needs to be integrated. Climate-related risk is relevant across multiple functions; regulatory compliance and disclosure, internal reporting, risk management, operations, facilities management, supply chains, M&A, due diligence processes, investments, and insurance. Climate intelligence needs to be a coordinated and well-integrated capability across the enterprise, with accessible, shareable and comparable science-backed information in order to support joined-up decision-making and efficient deployment of resources. Organizations need a climate intelligence provider that can enable multiple functions to be able access and share the same climate intelligence. We’ve built this functionality into Cervest’s CI product EarthScan™ which provides decision-ready intelligence on asset-level climate risk for millions of assets. Designed to be actionable, it goes beyond just providing climate analytics and data, and supports the development and monitoring of effective climate adaptation strategies.

Once climate intelligence has been integrated into multiple functions and workflows, it can be utilized to identify climate-related risks and opportunities and develop a clear view of what, where, when and how an organization and its assets are likely to be impacted by climate risk. Upskilling will be a necessary part of this process - climate literacy will be needed at every level, particularly in operational functions, where employees will be required to communicate climate risks and opportunities clearly and effectively to internal and external stakeholders. With an accurate understanding of asset-level risk spanning multiple functions, decision-makers can develop a joined-up and co-ordinated asset adaptation strategy to reduce the organization's risk.

As an example, one adaptation-focused global organization is using EarthScan to stress test its infrastructure investments. The long-term nature and fixed location of infrastructure means visibility of climate risk is critical. With EarthScan, they can identify their risk, and feed climate insights into their workflows to identify operability and expenditure risk for their assets. Using these CI insights, they are investing in targeted resilience measures that will secure stable, long-term financial returns for their clients.

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