Climate change has become irreversible. The development of renewable and environmentally friendly energy sources, as well as the gradual greening of the industry, gives hope for the best. The fight against global warming is being carried out at the level of companies, environmental regulators and states.
Climate change is becoming a significant subject of increasing influence on the economy and a crucial part of the political agenda. However, according to numerous evaluations, potential climate risks to well-being and stability are still underestimated.
On August 9, the UN Intergovernmental Panel on Climate Change (IPCC) presented a report
on climate over the past 7 years, saying that global warming is accelerating. The average temperature is expected to rise by 1.5°C by 2030, 10 years earlier than it was forecasted previously. In addition, it is noted that the quantity and severity of natural disasters have increased. Scientists associate this with greenhouse gas emissions from human activities.
, drought periods in some parts of the world are projected to reach 80% of the year, affecting the Mediterranean, southern Africa, and Central and South America. Historical precedents show that prices could rise sharply by 100% or more in the short term if global food volumes were to decline by more than 15%.
Global warming contributes to the destabilization of agriculture and the economy, leading to resource scarcity, social tensions, hunger, migration, and conflict. Freshwater scarcity, heat waves, soil degradation, erosion, desertification, floods, and storms do not recognize property rights and boundaries on the political map. Even climate-prepared companies and states can find themselves in a difficult situation.
Managing climate risk is not simple for two reasons: the scope of the problem goes decades ahead, and its consequences are global and irreversible. At the same time, climate risks directly affect the business.
The sectors of the world economy most exposed to the risks of extreme weather events and natural disaster risks tend to include the agri-food industry, construction, trade, tourism, transport, and energy. Thus, the decline in coal consumption in developed countries forced the coal mining industry to redirect its interests towards an emerging market.
The efforts of the world community to combat climate change have led to the emergence of another aspect of climate risk, not related to the direct impact of natural disasters or extreme weather events, but which was the result of stimulating the transition of society to a low-carbon economy
. These are compliance risks - the risk of legal sanctions, losses, or loss of reputation due to non-compliance with laws, standards, rules.
The regulatory policy pays attention to the impact of climate risks on financial stability and stimulates:
● investments in low-carbon energy and the reduction of emissions,
● issues sustainable financial instruments,
● supports responsible investment, taking into account ESG factors.
For the private sector, it is the challenge and the possibility of reducing climate risks in the future. The sympathies of the market already changed in favor of companies with the lowest carbon footprint and a high ESG rating
. About 800 institutional and more than 58 thousand private investors, controlling assets worth more than $ 5.6 trillion, including the world's largest banks JP Morgan, Goldman Sachs, Deutsche Bank, Citigroup, BNP Paribas, decided to abandon investments
in fossil fuels and sell related assets. The World Bank has seized funding fossil fuel projects since 2019.
Companies that are thinking about reducing their carbon footprint should start by accounting for greenhouse gas emissions. The recommendations
developed by the Working Group on Financial Disclosure of Climate Change (TCFD) will simplify this job. To change the business strategy, managers should follow these steps.
● Estimate greenhouse gas emissions and identify metrics to measure progress in reducing them. Carbon footprint management begins with the annual calculation of emissions and the disclosure of this information in public reporting. Quantification includes accounting for both direct and indirect emissions. It is crucial to evaluate both types, as many companies have a significant proportion of emissions classified as indirect.
● Identify main risks and opportunities. Climate change can increase raw material costs, capital expenditures, and asset insurance costs or entail additional tax liabilities. The effectiveness of climate risk management will determine how investors assess the company's prospects.
● Set measurable goals and develop a strategy to reduce climate impact. Improve corporate governance practices and disclose more data in reporting. For the climate strategy to be implemented, it is especially important to monitor the implementation of the goals set and regularly reflect the results in the reporting.
Following this approach will create a more stable and efficient financial system, minimize the impact on climate change, and contribute to sustainable development goals.
Global climate change
is one of the most pressing problems of our time. The private sector has a chance to make a positive contribution to sustainable development and to combat the negative effects of climate change. Together, states and companies are trying to minimize the effects of global warming, however, it is vital to act more actively and on a large scale.