In this modern world, climate change and ESG (Environmental, Social, and Governance) issues are really important, not to say optional. This is a global call for those in business to rethink their strategies with regards to measuring and mitigating environmental impact while providing proof for long-term sustainability. Therefore, it is to find a way to balance profit with responsibility, growth with conservation, and innovation with ethics. The article here discusses the increasing pressure for executives and policymakers posed by climate change and the ESG standard.
Understanding ESG in the Climate-Change Context
ESG is a matrix that assesses corporate behaviour in three areas: environmental protection, social equity, and governance. Advance your career in sustainability with the Short Professional Diploma in Environmental Management offered by the British Academy for Training and Development. Climate change, as a key component of environmental consideration, is linked to the way companies administer carbon emissions, energy consumption, and resource efficiencies. ESG has evolved into a mechanism, based on government and investor pressure, to gauge environmental and sustainability-related contributions to climate risk. Without the incorporation of climate issues, a company is poised for reputation loss and financial ruin.
Rise of Climate-Conscious Stakeholders
Much climate awareness is developing among investors, consumers, and regulators, demanding transparency regarding corporate practices. In agenda-driven organisations, shareholders are increasingly using their votes to pass climate-related resolutions that propel corporations toward net-zero agendas. Customers today are much more inclined towards eco-friendly operations of brands, and this consideration does shape their purchasing preferences. Hence business leaders need to meet these expectations or risk irreversible loss of market share and investor confidence. What is more, countries' regulatory frameworks require ESG disclosures, which makes climate performance a public matter. Stakeholder pressure shifts corporate priorities from short-term gains to long-term sustainability.
Regulatory Pressures and ESG Compliance
Worldwide, various governments are tightening laws with respect to carbon emissions, sustainability reporting, and climate disclosures. In certain conditions, like EU ones, companies are now publicly required under law to give effect to ESG frameworks such as the Corporate Sustainability Reporting Directive (CSRD). Removal from compliance can mean either legal penalties, reputational harm, or loss of business opportunity. Therefore, business players have to move on by putting ESG compliance mechanisms into their operations: developing measurable goals in sustainability, mapping their carbon footprint, and publishing ESG reports. By mandatory adaptation to the said legal requirements, they fight for their lives.
How will climate change impact businesses?
The climate crisis is changing how we live and how we work. These effects are already being felt in various businesses across the majority of industries. On the contrary, climate change and the transition to a net-zero future can bring forth new industries and growth opportunities for businesses, thereby creating new jobs and revitalising economies.
Virtually every industry is under threat from the effects of climate change, whether from direct or indirect sources. Companies needing to assess how a changing climate would directly affect their business should consider broadly three categories of risks: physical, transition and liability risks.
1. Physical risks
The physical risks from climate change effectively constitute immediate threats from nature. Flooding, hurricane, drought, wildfire, and other natural hazards aggravated by climate change are threats whose physical impact on humans, property, and essential infrastructure needs no elaboration. As an example, an estimated 1.8 billion people (which is 23% of the world's population) today live directly under flood depths greater than 0.15m in a 1-in-100-year flood event, whereas 700 million people are at risk of displacement from drought by 2030.
Business operations are getting disturbed with the increasingly frequent occurrence of extreme weather events. The economic loss due to global natural disasters in 2023 was USD 380 billion; only USD 118 billion of these losses were insured.
2. Transition risks
Transition risk is borne through costs of doing business potentially becoming higher due to new policies, laws, and other forms of regulation introduced to curb climate change. Transition risks can also be wrought with changes in technology and consumer trends, and thereby potential reputational risk, as society's perception of ethical business practice changes. Additionally, industries will be setting themselves with regard to making transition risk a priced factor as they are moving away from climate change dedicated activities which result in stranded assets, a parcel of land, property, or equipment that has decreased in value.
The energy sector is woefully susceptible to transition risk. With the increasingly important green energy push and energy security, governments are moving towards renewable energy sources and expecting net-zero carbon emissions from energy producers.
Mining is another sector exposed to transition risks. Precious metal mining, for example, faces potential financial risk from policies imposing carbon pricing. The adverse impacts of mining on climate and the environment are fast becoming a reputational issue for mining companies, with investors wary about doing business that could incur damaging repute by association.
3. Liability risks
Liability risks arise from the inability to mitigate, adopt, disclose, or comply with changing legal and regulatory expectations. Climate litigation is on the rise globally. Climate change court cases have increased more than twofold during the period of 2017 to 2022 owing to various factors: growing attribution science, evolving legal contests, and changing public opinion regarding climate issues. This is further enhanced by increased scrutiny from regulators and investors demanding that corporations make the appropriate disclosures amid the ever-changing regulatory landscape.
On the other hand, companies that failed to consider climate change in their products and services may also be sued. For example, structural engineers or property developers who do not take increased rainfall intensity into account for the design of drainage systems.
How should businesses respond to climate risks?
Any company is impacted by different proportions of these physical, transition and liability risks,” Amar Rahman, Global Head of Climate and Sustainability Solutions at Zurich Resilience Solutions, explains. „Some industries will be more worried by regulatory requirements while others might be more concerned by the loss of assets through physical damage. But companies should consider all these risks, short and long term.”
Managing climate resilience and adaptation by companies requires a paradigmatic shift. Climate risks should become core business risks, and their mitigation should form part of the business strategy. However, as the manifestations of climate change evolve and threaten, risk assessment should become more frequent.
Such steps could lead to businesses investing in new technologies, entering other avenues in industry, or adapting their business models. For example, in Switzerland, the Arosa ski resort is making adjustments to their summer tourist model to safeguard their business interests from diminished snowfall in winter. Ski resorts have also incorporated new technology, one example being cloud seeding to encourage clouds to release snow and wind-powered snowmakers that can function even when the temperature is above freezing.
Leadership Skills for an ESG-Focused Era
A new kind of leading requires systems thinking, climate literacy, and stakeholder engagement – the make-up of skills needed for leadership in the era of ESG. Simple financial measures may have sufficed for decisions before, but a new role now requires understanding the environmental and social-related business effects. So it takes continued learning, cross-functional collaboration, and adaptive thinking. Executive teams should now find their way to include sustainability experts and ESG strategists. Inviting investors, regulators, and employees into confident leadership through proactive, transparent approaches.
How to Convert ESG Challenges into Business Opportunities
Climate change and ESG will draw today 's executives into challenges that give rise to opportunities for innovation and increase growth. By being open, investing in sustainability, and ensuring the alignment between purpose and profits, leaders would be able to have future-proof companies. ESG would not mean just reducing risks but turning out to be a map to strategic superiority and the loyalty of stakeholders. The leaders in ESG performance will have the best chances for surviving in a green economy.
Managing climate change risks
Businesses all over the world are feeling the impacts of climate change. Fast action in the direction of reducing the negative impacts on our planet is indeed vital, but it's also profitable. By taking steps today, these companies can not only reduce the risks involved with climate change but potentially seize the emerging opportunities of a greener future. Companies that identify and act on climate risks now will have a better chance to not only survive but to thrive in a new net-zero world.