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Facing up to the urgency
Crosscurrents like those just described emphasize how important it is for CEOs to get practical about their own goals and climate ambitions—and quickly. This starts with gaining a better understanding of what a changing climate means for their companies. In our experience, doing so helps leaders develop a better understanding of the science, the implications, the trends, and even the technical language that can help them make better informed decisions. Top management teams will need such understanding—and shareholders, investors, employees, customers, and other stakeholders increasingly will expect it.
The three examples that follow tee up the sorts of lessons that companies learn when they rigorously investigate climate risk, while highlighting the practical steps that organizations can take to improve. As we’ll show, it all starts by taking a close look at the breadth of the company’s value chain, and seeing how the various elements respond to the stresses of science-based climate scenarios. We hope that these examples help serve as inspiration, and if necessary, as a wake-up call for companies that may have been putting off their own analyses under the mistaken assumption that the challenges were safely off in the distant future.
Floods, drought, and new products
A global industrial equipment maker was keen to assess its physical exposure to climate change in the context of better defining a fuller climate agenda. It started with physical risk, by analyzing how its own global operations and those of its key supply chain partners would be affected by a scenario in which the world continued to rely heavily on fossil fuels.
The modeling showed the executives that more than two dozen of the company’s manufacturing and other sites were at elevated risk of flood damage. Three of the sites had already been experiencing problems. Meanwhile, a different two dozen sites were subject to increased drought in the years ahead, which posed risks to the company’s manufacturing operations. Further analysis revealed weaknesses in the company’s supply chain, and instances where materials that it sourced from a single supplier could be in jeopardy.
All told, the analysis helped the company better understand the risks it faced from a changing climate and how they might affect various parts of its value chain (including a detailed financial view). At the same time, the effort helped management generate new strategic options and test its resilience against them.
Finally, while the company learned that it needed to revamp a key product, lest it malfunction in areas experiencing wetter conditions, the effort also identified new products it could develop to help meet rising customer demand for climate-resilient offerings.
A retailer takes stock
A large retailer that wanted to quantify its climate vulnerabilities, given the new TCFD requirements, started by analyzing a range of risks (among them regulation, market, technology, and reputation risks) to see how they might affect key parts of the business under two warming scenarios. The exercise showed company leaders how disruptive the economic transition to a low-carbon economy could be. For example, in one warming scenario, the retailer could face an 18% increase in overall transportation costs by 2030. And when the leadership team factored the company’s growth plans into the equation, the costs more than doubled.
To tackle these climate transition risks, the company began investigating ways to reduce its dependency on conventional road transport, while seeking out new suppliers that were ahead of its current ones in preparing for a green transition. Along with this reconfiguration, the retailer added climate into its strategic calculations in a more robust way—for example, by looking more closely at its approach to delivery, how it might rely more on electrified transport and other greener alternatives, and even how the location of its stores affected its climate transition risk (based in part on how it expected the climate expectations of customers to evolve).
In addition to identifying climate transition risks, the retailer’s deep dive uncovered worrying physical risks. Under one warming scenario, the leadership team saw that dozens of its buildings in three important markets were at heightened risk of storms and floods. The cumulative revenue loss from these events was significant enough to prompt the retailer to look into extending resilience measures in the three markets to help guarantee future insurance coverage. The retailer also promptly began to reflect this new risk assessment in its location selection strategy as well.
A conglomerate finds risk—and opportunity
The conglomerate we highlighted at the beginning of this article began its journey by tasking a cross-functional team with conducting a vulnerability assessment. Using the TCFD framework, the team identified more than three dozen risks and opportunities most relevant to the company’s situation.
Using scenario analysis, the team explored how the company’s prospects might change under different warming scenarios, converting the analysis into a series of heat maps for several of the organization’s key business units. Although some maps showed significant risks, others showed a mix of opportunities, too. Underscoring the difficulties that CEOs face in confronting these issues: in one case, the same physical risks represented a serious challenge for the customers of one business unit, and an opportunity for the customers of another.
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