The true test of climate resilience
Tough questions for every business leader.
When I sit down with business leaders, many tell me they believe it’s important to manage the impacts of climate change on their business. But what does it mean for a business to be truly climate resilient? Our teams are seeing firsthand how forward-thinking companies are taking action to help ensure enduring success in a business environment that is being rapidly transformed by climate challenges.
However, not all companies are on this journey to true climate resilience. Our recent CEO Survey of over 4,000 business leaders suggests that some may be setting too low a bar for climate resilience. The survey results show that even though many CEOs are setting goals to reach net zero emissions, often they don’t perceive serious threats to their business operations from climate issues.
These leaders may see climate as a compliance matter rather than an issue that is reshaping the business environment and could strike at the heart of their business models. As a result, many companies may be under-prepared for the true scope and scale of climate-linked disruption to the business.
Here is the reality: both accelerating climate change and the world’s increasing efforts to combat it are changing the business environment faster and more thoroughly than many companies are prepared for - even those with net zero commitments. Committing to net zero emissions is a critical step forward, but it may not be enough to secure the company’s successful future in a net zero world.
A company could reduce its emissions to zero and still be blindsided by other risks: crushed by supply chain disruptions due to climate change, hit by regulation or carbon pricing that render business models unsustainable, punished by the increasing cost of capital for companies without a clear place in a low carbon future, left behind by customers demanding new levels of climate performance, or simply displaced by competitors who moved faster to build the new low carbon economy.
CEOs need a clear-eyed view of the forces changing the game and creating risks - and opportunities - for all businesses, not just those in carbon intensive industries.
In my conversations with business leaders, we’ve talked about the climate-linked forces that forward-thinking leaders see at work - and the tough questions they are asking themselves in response to help ensure true climate resilience. These forward-thinking leaders are unlocking a world of opportunity for their firms to be at the center of a future low carbon economy.
Below, I share some of the changing realities - and five tough questions.
Five Tough Questions
Climate Change Impact?
“Have you mapped the company’s near and long term physical risks/vulnerabilities across the chain and geographies of operation for different warming scenarios?
Climate change is already here, disrupting supply chains, business operations, and communities. It’s a rare business that has no offices, plants, or people in affected areas, no upstream suppliers or downstream customers exposed to climate risk, no reliance on natural resources or ecosystems, and no vulnerability to climate-change political instability, resource shortages, or economic downturns.
Transparent Climate Risk?
Are you prepared for a business environment in which your climate risks and transition plans are transparent, public and financially material to investors, lenders and insurers?
Climate risk reporting requirements are strengthening rapidly. Taskforce for Climate-Related Financial Disclosures (TCFD) is the emerging global standard for climate-related financial risk disclosure, underpinning a wave of emerging standards from regulatory bodies like the SEC. Financial institutions and investors are increasingly taking a company’s climate risks and transition plans into account. Climate risk will increasingly affect a company’s credit rating, valuation, and ability to borrow.
Stronger Policy?
Are you prepared for a stronger government climate policy such as carbon pricing, restrictions on carbon intensive activities or support for low carbon projects?
Governments managing 90% of global GDP have made substantive commitments related to emissions reductions. These commitments can only be met by dramatic transformation of the economic system to decarbonise at least 5x faster. (1) Through commitment is not the same as action, the stage is set for stronger climate policy.
Public Judgement?
Are any parts of your business model open to criticism on climate grounds - or could they be as the public’s expectations evolve?
More and more, consumers and workers view poor climate performance as unacceptable or unethical, and gravitate towards companies whose climate credentials they trust. Net zero alignment will increasingly affect a company’s reputation, brand, and ability to attract customers and staff.
Bold Proactivity?
Are you just reacting to climate developments or are you boldly re-envisioning the company’s place in a low carbon future, putting climate at the heart of your strategic planning process to seize the opportunities at hand?
Large scale disruption creates tremendous opportunity, particularly for those who move fast and boldly. The winners of future climate-driven markets and business models are being determined today. Vast opportunity awaits firms that find ways to deliver a low carbon transition that protects the lives and livelihoods of the world’s nearly 8 billion people.
In sum, the world’s effort to grapple with climate change is more than a story of compliance. It is a story of reinvention. To end our dependence on fossil fuels - and cope with the climate change already happening - we need to rethink how we live, work, eat, move, and power our lives.
Business leaders in all sectors should fully understand and be ready to navigate the true size and scope of accelerating climate-linked disruption, whether through the direct impacts of climate change or through the upheaval of society’s transformation to sustainability. The world’s transition away from carbon will be rocky - today, the war in Ukraine is both slowing and speeding the transition to renewables - but the direction of travel is clear.
I have seen firsthand the business community’s active involvement with climate and broader environmental issues. I have been impressed by the level of energy and engagement, but we still have a tough journey ahead to turn commitment into action and deliver sustained impact at scale. Grappling with these tough questions is a great place to start to promote business resilience and help ensure future success - for both companies and the planet.
Huge opportunity awaits firms that lead the way toward a low carbon future.
Bob Moritz PwC's Global Chairman
Footnotes:
1. PwC’s 2021 Net Zero Economy Index showed that the world must decarbonise 5x faster to have a chance of limiting warming to 1.5C.