Climate Change: Why Is It Important For Business?

According to geological studies, planet Earth is 4.6 billion years. Over the course of Earth’s long history, the planet has undergone various climate cycles that have continuously shaped and re-shaped our surrounding ecosystems. These changes in the natural climatic conditions over the years have very much supported the growth of human civilization. Today, the phrase climate change is often used to describe an existential crisis threatening the planet mainly driven by continuous industrialisation since the late 1800s. It is widely accepted that further increases in greenhouse gas emissions and Earth’s temperature could trigger a sequence of harmful events that can render the planet inhospitable to life.

Mitigating climate change requires bold and sustained actions from all parties including businesses at large. Climate change is a global phenomenon and the repercussions of inaction can impact all companies regardless of size and industry. Therefore, to create better outcomes for the planet, here are three important steps companies should consider taking.

Incorporate climate risks

The rate of warming and subsequent changes in climate patterns can have cascading effects on our socioeconomic systems and introduce significant risks to business. Thus, from a company’s perspective, it is vital to consider the potential business implications and integrate material climate issues as part of the risk management processes and corporate reporting. In this regard, the Task Force on Climate-related Financial Disclosures (TCFD) recommendations provide a useful guidance to help companies identify and disclose relevant climate risks and impacts that require attention. The recommendations essentially can be applied by both financial and non-financial companies across various industries and sectors.

According to the World Economic Forum’s Global Risks Report 2021, extreme weather, climate action failure, and human-led environmental damage are among the highest likelihood risks for the next ten years. Further, the world’s largest greenhouse gas emitters such as the US and China are also likely to set more aggressive national climate targets and develop climate-friendly policies and regulations in the future. At the same time, a growing number of investors are already incorporating climate risks in their risk-return expectations, given the potential impact of climate change on economic and financial stability. All the above undoubtedly will have spillover effects on the business environment. Therefore, establishing a structured environmental risk mitigation framework can help companies to build resilience against emerging climate events and forward-looking scenarios that anticipate a carbon-constrained future.

Future proof your business models

As stakeholders become more environmentally-conscious, companies ought to re-imagine business models in ways that can maximise positive impacts on the planet while creating value for shareholders. The green revolution is already underway and is transforming most industries. For instance, the renewable energy industry is growing at record pace as more countries ramp up their clean energy supply to meet their respective climate pledges. At the same time, the cost of renewable energy such as solar and wind is also getting cheaper which further increases its competitive advantage against traditional fossil fuel electricity sources. Similarly, we are also seeing an increase in demand and investments in zero-emission vehicles, battery storage technologies, energy-efficiency solutions, green agricultural techniques, sustainable packaging and other climate-friendly solutions. Many governments are already incorporating green growth as part of their development strategies which will further create better market conditions for these industries. Thus, it is vital that companies continue to build internal capacities to unlock opportunities created by the green revolution.

There is still a significant amount of ambiguity with respect to the concept of green and transitions required for a low carbon economy. As such, the final issuance of the Climate Change and Principle-based Taxonomy guidance documents by Bank Negara Malaysia on 30 April is timely to facilitate financial institutions to assess and classify economic activities that are aligned with green growth agenda. However, it is also important that we work towards global convergence of green taxonomies to create a common language that can be adopted across different markets or jurisdictions. This is especially important in the capital market to support robust due diligence processes, develop appropriate benchmarks and facilitate greater investments in green assets.

Manage supply chains

It is also important for companies to engage suppliers to create shared value. A detailed assessment of the supply chain can also help companies to ascertain the likelihood of supply chain disruptions due to increased frequencies and severity of extreme weather events and changing climate patterns. Further, it provides an opportunity for companies to work closely with suppliers towards common environmental goals and targets. This essentially can create a multiplier effect in the supply chain and encourage smaller companies to also adopt sustainable practices that benefit the environment and respond to climate vulnerabilities.

Start acting now

We are now entering an important decade of action to combat climate change. The decisions we make today as a society will have lasting effects on our future. The COVID-19 pandemic has been the perfect example to demonstrate the interconnectedness between nature and society as well as the need for multilateral and collective efforts in overcoming a global challenge. Thus, it is imperative that we embrace business strategies that protect the environment to prevent the climate crisis that is looming in the background. We at Bursa Malaysia are on this journey too; actively managing our environmental footprint and assessing climate-related risks and opportunities for the exchange, among others. Let’s do our part and start acting now.