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How EY can Help
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Supporting organizations with physical and transition risks associated with climate change, and assisting them with market and regulatory changes.
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Financial and planetary value are not mutually exclusive
A key debate in the boardroom and C-suite is about balancing the financial and nonfinancial trade-offs of pursuing climate action — something two in three companies (64%) agree is challenging. But while trade-offs are not always avoidable, financial and planetary impacts are not mutually exclusive. When global disruptions arise, long-term sustainability planning makes it easier for companies to stay the course on their climate plans or find new opportunities to create value from sustainability. This helps safeguard climate initiatives from becoming side projects or marginal philanthropic efforts that are liable to be cut at the first sign of trouble.
Companies should also look to climate initiatives as a means to mitigate risks. Climate risk is of particular concern because it is often measured inadequately. The most recent EY Global Climate Risk Barometer found that too many companies are still either not conducting scenario analysis or not disclosing the results. Under a third of respondents in that survey reference climate-related matters in their financial statements, both qualitatively and quantitatively.
Yet scenario analysis, such as that recommended by the Task Force on Climate-related Financial Disclosures (TCFD), is a powerful tool for anticipating climate-related risks and opportunities. Some 95% of “pacesetters” in our survey conduct scenario analysis every year or are on their way to doing so, compared with just 35% of “observers.”
In addition to mitigating risks, many interviewees are uncovering opportunities to create new products and services — or even capturing new markets. Unilever, for example, aims to sell €1b worth of plant-based meat and dairy alternatives by 2027. And Cargill established Cargill RegenConnect, a regenerative agriculture program that connects farmers to new and emerging markets like the carbon marketplace.
Finally, being intentional about the connection between financial and other forms of value can make it easier for companies to embark on holistic ambitious climate strategies.
While win-win scenarios like the Cargill example provide an easier path to management buy-in, companies can’t realistically expect every initiative to have a positive financial impact. Nor should governments or society realistically expect companies to altruistically invest in climate initiatives regardless of their financial returns.
The key is creating a balanced portfolio — initiatives that generate financial value subsidize those that have positive planetary impact but minimal or negative financial return. We see that, on average, 37% of initiatives will have a positive return over their lifetime, while only 19% will have a negative return. This should motivate those in the early stages of their climate action journey to increase their investments in a balanced portfolio of climate initiatives.