Addressing physical climate risks is not just a regulatory requirement; it is a strategic imperative for businesses. The Green Deal, with its non-negotiable impact, emphasises that businesses failing to recognize both opportunities and risks may find survival in the new paradigm increasingly challenging.
In the ever-evolving landscape of sustainable business practices, decarbonization stands out as a critical imperative, especially for energy-intensive companies. The European Union’s Green Deal and Sustainable Finance Action Plan have ushered in a new era, redirecting financial resources towards companies committed to sustainability. Underpinning this initiative are key measures like the Taxonomy Regulation and the Corporate Sustainability Reporting Directive, which establish criteria for sustainable economic activities and mandate companies to report on environmental, social, and governance (ESG) issues. To some it may sound simple enough, but the transition towards a sustainable economy is not without challenges. Are you completely prepared for the hurdles your business will have to overcome?
Identifying and overcoming the challenges
Businesses must grapple with legislative changes, the financial implications of CO2 emissions, and the adoption of innovative technologies. Moreover, they face risks ranging from supply chain vulnerabilities to potential reputational damage. The impact of the Green Deal is not confined to individual companies; even banks and insurance firms are compelled to disclose investment activities, classify sustainable products, and adjust their strategies to consider ESG risks.
In conclusion, decarbonization has become an integral part of a holistic business model. Companies navigating the shifting regulatory environment and market pressures are better positioned to remain competitive. The Green Deal offers a comprehensive framework for this transition, presenting opportunities that companies must seize to secure their future.
The Green Deal and the Impact of CO2 Pricing on Businesses
CO2 pricing emerges as a pivotal factor within the broader context of the Green Deal, exerting a profound impact on businesses, particularly those characterized by high energy consumption. The European Emissions Trading Scheme (ETS) is a key driver, affecting approximately 200 companies in Austria engaged in trade amounting to around 30 million tons of CO2. For energy-intensive companies, the cost of CO2 emissions and the allocation of pollution rights are significant determinants affecting investment decisions and amortization periods.
The trajectory of CO2 prices remains speculative, but a consistent upward trend has been observed since 2017. A study by EY underscores the likelihood of increased CO2 pricing in the years ahead, necessitating a proactive stance from companies. As per the National Energy and Climate Plan (NECP), aligning with the EU’s ambitious targets requires companies to adapt. They must contemplate scenarios that include CO2 pricing as a critical influencing factor in their sustainability strategy.
Beyond emissions trading, companies are exploring diverse approaches, from transitioning to alternative energy sources to altering manufacturing processes and business models. The energy industry, a linchpin in the transition, grapples with challenges tied to new technologies and infrastructure development, including the supply of sustainably produced electricity.
Adapting to Climate Change: Managing Physical Climate Risks
Aside from the imperative strategic need to address physical climate risks, under the new reporting requirements, namely the CSRD, there is a need for companies to address and discuss factors such as temperature fluctuations, rainfall patterns, erosion, wildfires and floods and the associated impacts on their businesses, their processes and business models. Traditionally, companies have relied on historical and statistical data to manage these risks. However, the evolving nature of climate change demands a forward-looking approach, necessitating consideration of potential environmental shifts.
Climate models and scenarios, such as the IPCC’s representative concentration pathways, offer valuable tools for assessing future risks. Beyond internationally agreed-upon climate models, localized models provide enhanced resolution, enabling businesses to evaluate risks specific to their locations. Companies, spanning industries from tourism to manufacturing and finance, must comprehend the implications of climate change on their business models across short, medium, and long-term horizons. For example, localized data, such as the ÖKS 15 for Tyrol, reveals trends like increasing heat days, extended vegetation periods, decreasing frost days, and altered precipitation patterns. Understanding the societal and economic impacts of these changes is paramount. Businesses must proactively integrate Environmental, Social, and Governance (ESG) factors into their risk management systems to make their operations resilient to climate-related challenges.
Climate Risk analyses: integrating sustainability into your company’s DNA
In conclusion, addressing physical climate risks is not just a regulatory requirement; it is a strategic imperative for businesses. The Green Deal, with its non-negotiable impact, emphasises that businesses failing to recognize both opportunities and risks may find survival in the new paradigm increasingly challenging. As companies forge ahead, integrating sustainability into their DNA, they not only navigate the challenges but also position themselves as leaders in a future defined by environmental responsibility.
For us it is abundantly clear: ESG affects all companies and is diverse and interdisciplinary. The transformation is inevitable and not adapting your business model is not an option – what’s more, time is running out! Non-financial reporting is being fast tracked by companies and money will flow into green investments. It is crucial therefore that ESG must be part of your organisation’s risk management system. To overlook it could be fatal.
Harald Ketzer
Risk & ESG Consultant
T +43 664 888 44 707
Sabine Bradac
Risk & ESG Consultant
T +43 664 962 39 57
Related articles
Insured by Algorithms
The insurance industry is undergoing a profound transformation, driven by the rapid adoption of AI and predictive analytics.
Beyond Moving Cargo: Why Employee Well-Being Is the Real Asset in Logistics
In today’s employee-driven market, especially for Gen Z talent, benefits aren’t just perks – they’re strategic tools for attraction and retention
The New Edition of FORWARD Magazine Is Now Available
GrECo is proud to present the latest edition of our client publication, FORWARD Magazine—now live and ready to explore.
