3. The Climate Change Challenge
3.7 Business Impacts of Climate Change
Exposure to climate change can be positive, negative or a combination of both, depending on the industry and the company-specific variables (Schultz & Williamson, 2005). Climate change presents both risks and opportunities for business. The impacts of these risks and opportunities vary significantly among businesses, depending on the source and exposure to greenhouse gas emissions (Reyers et al., 2011), i.e. direct emissions as a result of a company‘s own operational activities, or indirect emissions such as those along a business‘ value or supply chain, e.g.
purchased electricity, resource availability, resource costs and security of supply, changes in customer needs as a result of changes in economies, or weather induced requirements (Schultz
& Williamson, 2005).
Business risks from climate change include physical impacts resulting from volatile weather conditions which are resulting in extreme weather patterns (droughts, wildfires, hurricanes, monsoons, typhoons), rising sea levels, melting ice glaciers, and the resultant effects on animal and human health and well-being (Dow & Downings, 2011). A key risk for business is access to resources and risks to capital stock, such as infrastructural damage due to sea level rise. As a consequence of the above, there are negative impacts on business resources, personnel, insurance markets and corporate business models (www.pewclimate.org). Mounting legal and regulatory pressures and litigation is being augmented by country level or industry level investment risks and increasing public and stakeholder activism affecting business reputation and brand equity (Schultz & Williamson, 2005).
Opportunities and Risks
For the agile firm, climate change is also presenting numerous opportunities including revision of business models to allow for greater efficiencies in terms of materials and energy, waste, water, etc.; development of new and cleaner technologies, products and services, industries and participation in whole new industries which were non-existent a decade ago; participation in carbon markets and emissions trading giving rise to new revenues; strengthening of reputation and the brand by managing stakeholder requirements, advocating climate change response and making contributions to solving climate change issues (Raymond & Brown, 2011).
Climate change risks cut across almost every industry, whether directly or indirectly. The greatest liability in carbon exposure is in carbon-intensive sectors such as oil and gas, basic resources, utilities; heavy manufacturing where carbon costs could be direct or be due to purchased electricity or passed down through the supply chain in the form of higher prices (www.irrcinstitute.org). Some of the major risks are explained below.
3.7.1 Legal and Regulatory Risks
As emission reduction requirements become more well-defined and stringent, non-compliance risks and consequent litigation risks rise. Regulatory risks are on the increase the world over as governments take heed of the calls to action through treaties such as the Kyoto Protocol;
regulations; national resolutions or local government and federal regulations. These national and international commitments are creating environments where the need for dialogue
(Griffiths, et al., 2007) between governments and the private sector are becoming increasingly unavoidable, resulting in policy positions that are forcing corporations to seriously consider the impacts of climate change on their businesses.
The lack of climate change legislation or the slow enacting thereof in some jurisdictions is creating discomfort within the corporate community (www.nbi.org). This has been a subject of much debate in South Africa. A key question has been posed: ―Supposing a proactive company takes action to reduce GHG ahead of legislation. Will the authorities take cognisance of the new baseline when they calculate an entity‘s emission levels and the required limits?‖
3.7.2 Competitiveness Risks and Opportunities
With adverse weather conditions (Khandekar et al., 2005; Stern, 2006), changes in climate may cause damages to buildings, interruptions to infrastructure and supply chains. It may also change travel and migration patterns, affecting such business decisions as location decisions and geographic markets to pursue. For example, the European Union Directive on Aviation (http://ec.europa.eu) is causing viability challenges for airlines. The introduction of climate change specifications on goods imported into the EU and the imposition of taxation on imports through Border Tax Adjustments (BTAs) poses serious trade barriers (http://ec.europa.eu).
Businesses also face the obvious risks of changes in the prices of oil, gas, electricity and, where required, carbon. To mitigate these risks, companies can either reduce their exposure or hedge the risk (Mills, 2005). Such attempts to pass through carbon costs will add onto the prices of goods and services, making products uncompetitive on global supply chains.
Product and Market Diversification
The pursuit of diversification as a business strategy - the need to enter into new businesses;
shift away from low margin, low growth or mature industries, distribute risk, utilise excess productive capacity, compensate for technological obsolescence, reinvest earnings into high growth industries (Carbon Trust, 2006), are key drivers for businesses to respond to climate change. By investing in efficient technologies and developing sufficient skills to support value addition e.g. significantly reducing energy costs, streamlining the supply chain and meeting stakeholder expectations, benefits will trickle to the bottom-line. Several companies are investing in research and development to come up with environmentally-friendly products with
new revenue streams (e.g. SunChips by Frito-Lay: www.sunchips.com) and services which open up new markets and industries. Companies are seeking market opportunities in developing new technologies, often backed by venture capitalists and ―green capital‖. Some of those companies have grown into publicly traded, large organisations, e.g. SolarWorld (www.solarworld.de).
Other investors seek specific opportunities in renewable energy assets, such as solar, wind farms, tidal waves, biomass or co-generation promising more stable growth.
3.7.3 Investment Relations – Risks and Opportunities
Financial markets are calling for more robust corporate disclosure of carbon intensity so as to factor the carbon profiles into capital allocation and investment decisions (www.caring4climate.org). There is also increasing pressure on businesses to report non- financial issues related to climate change, through mechanisms such as The Carbon Disclosure Project (CDP). The cost of capital will likely be influenced by a company‘s ability to mitigate exposure to liabilities posed by a carbon-constrained world (CDP, 2012). Bank-lending criteria that take cognisance of climate change mitigation have already been incorporated by leading multi-national financing institutions (www.worldbank.org). Investment decisions in assets such as power stations, industrial plants and buildings are already being driven by carbon intensity considerations. The cost of capital associated with carbon-intensive investments is an additional risk that can become more prominent in the future. Discounting of share prices for companies poorly placed to compete in a carbon-constrained world is already taking place in most of the Annex I countries (www.pewclimate.org). Thus, financial exposure from climate change affects business‘ ability to raise capital and impacts on credit ratings.
3.7.4 Brand Equity
Public perceptions of corporate behaviour have the potential to impact the bottom line of businesses (Reyers et al., 2011) and the very existence of certain businesses. A 2002 study of European and American businesses showed that the value-at-risk because of climate change varied between companies by a factor of 60 times (Innovest Strategic Value Advisors, 2002). A 2008 study by Point Carbon showed that the market capitalisation of American business was impacted by between 10 and 35% due to climate change–related risks. Several organisations have stepped up educational and awareness building programmes on climate change (CDP,
2010). Organisations that are seen to be taking steps towards carbon-neutrality are reaping benefits (Schultz & Williamson, 2005), while those choosing to ignore the calls oppose climate change action outright, may have to bear the brunt of the repercussions, including increased scrutiny of business activities, reduced ability to attract talent and investments, consumer boycotts, media coverage and potential litigation (www.pewclimate.org). Those companies that will succeed in portraying a positive image of their efforts to mitigate climate change stand to gain market share at the expense of the laggards (Deutsche Bank Research, 2007).
3.7.5 Supply Chain and Operational Risks and Opportunities
Achieving sustainable environmental management along a whole supply chain is complex due to global business management trends (Welford & Frost, 2006) like global sourcing and off- shoring. In their study of multinational supply chain partnerships, Cheung et al., (2009) found that companies are adopting a top-down approach to green supply chain management by imposing higher ―green‖ standard on their suppliers. As a result, business-to-business relationships are increasingly incorporating environmental sustainability standards (Welford &
Frost, 2006). On the other hand, accounting for emissions along a supply chain can help identify lucrative emissions and cost reductions (Stoffberg & Prinsloo, 2009) and other value- creating opportunities.