How to generate strategic value by building climate resilience

Businesses should consider integrating climate resilience into their strategy to respond to the climate crisis and create long-term value.

In brief

• Greenhouse gases in the atmosphere are increasing at an alarming rate. As a response, organizations should integrate climate resilience into strategies.
• Addressing climate-related risks and leveraging opportunities should be a material topic discussed and governed within the organization.
• Organizations should identify and assess climate-related risks and opportunities, manage adaptation and mitigation strategies, and set clear goals.

Greenhouse gas (GHG) concentrations in the atmosphere are increasing at an alarming rate, with more than 80 days recorded in 2023 where temperatures exceeded 1.5^oC above pre-industrial levels (United Nations Environment Programme, 2023). While the world has not exceeded the 1.5^oC temperature limit specified in the Paris Agreement, the National Oceanic and Atmospheric Administration (NOAA) and the EU Climate Copernicus are signalling that we are getting closer.

It is more crucial than ever for each of us to contribute to addressing climate change. Organizations, including financial, government and learning institutions, hold an even greater responsibility to act and understand their climate risk exposure due to their scale and impact.

Meanwhile, climate and environmental regulations are becoming more stringent, such as US Securities and Exchange (SEC) climate-related disclosures rules and European Sustainability Reporting Standards (ESRS), and investors are increasingly more focused on organizations’ climate-related impacts, risks and opportunities.

Both physical risks, derived from weather-related events and long-term climate shifts, and transition risks, associated with a global shift toward a low-carbon economy, carry financial and reputational implications for organizations. The significance of understanding these risks and opportunities is no less crucial than addressing personal safety risks at work, process safety risks in complex manufacturing facilities, cybersecurity risks in technology, or liquidity risks in investment and financial transactions.

Identifying and understanding climate-related risks and opportunities allows organizations to evaluate potential exposures and integrate climate resilience into their governance, processes and controls that can strengthen their business resilience.

Climate resilience is the ability of an organization to adapt to and mitigate physical and transition risks associated with climate change, while also leveraging any climate-related opportunities to transform its own climate impact and deliver lower-emissions products and services.

As the pace of regulatory changes accelerates and as consumers become more informed due to connectivity and technology, organizations should recognize the physical and transitional changes that surround their assets, operations, products and services due to climate change. They should also consider how these changes may impact their business in the short-, medium- and long-term time horizons.

By recognizing and understanding these climate-related risks and opportunities, organizations can shape their future and bolster their market position and reputation to foster long-term success goals.

What actions should organizations take to start integrating climate resilience into business processes, governance and decision-making? We recommend the following:

1. Establish governance to evaluate and manage potential impacts.
2. Identify and assess relevant climate-related risks and opportunities.
3. Define and manage climate risk mitigation and resilience strategies and plans.
4. Set climate-related goals and targets and monitor progress.

Establish governance to evaluate and manage potential impacts

The purpose of governance is to oversee the organization’s progress in addressing climate change and demonstrate its commitment to climate resilience. Effective governance should align with and complement existing business models, organizational structures and enterprise risk management programs, allowing the organization to continually evaluate climate-related business requirements and integrate their associated risks and opportunities into enterprise-wide strategies and decision-making.

When establishing governance to manage climate resilience for the organization, businesses should consider the following:

• Regular and comprehensive updates for management and top-level executives on climate-related challenges. Climate-related risks and opportunities should be a recurring subject matter in management and executive meetings, akin to topics such as personal and process safety, cybersecurity and financial performance.
• Inclusion of climate-related issues in overall strategy reviews and risk management policies at the highest levels of the organization, similar to other material risk considerations.
• Establishment of documented controls and processes in assessing climate-related risks and materiality, including clear roles, responsibilities and accountability regarding climate resilience for personnel at every level of the organization.
• Close monitoring of progress against targets for addressing material climate-related issues, with findings being reported regularly to the organization’s board and executive leaders.

Identify and assess relevant climate-related risks and opportunities

Organizations should identify, analyze and manage both climate-related physical and transition risks, as well as take advantage of climate-related opportunities. Physical climate-related risks are associated with the physical impacts of climate change. They can include acute risks, which occur from extreme weather events (e.g., hurricanes or floods), and chronic risks, which occur due to long-term shifts in climate conditions (e.g., higher average temperatures or sea level rise).

Transition risks arise from the global shift toward a low-carbon and climate resilient economy. These risks not only impact business operations but also directly affect products and services. They stem from policy and legal changes, technological advancements, market shifts and reputation challenges. The global shift toward a low-carbon economy, evident in the rapidly evolving regulatory environment, underscores the need for organizations to understand, identify and assess their climate-related transition risks.

Transition risks can have substantial implications on the products and services offered by an organization. They may lead to reduced demand for existing products and services, as customers increasingly seek climate-conscious alternatives. Beyond potential financial implications, these changes can disrupt business operations and harm an organization’s reputation. Failing to adapt to these shifts puts organizations at risk of losing relevance in a market that is increasingly focused on climate considerations, resulting in a loss of market share.

Climate-related physical and transition risks should be identified through thorough climate risk assessments, which include an analysis of an organization’s operations, supply chain and markets under various climate scenarios. Incorporating climate scenarios and time horizons into climate risk assessments allows organizations to understand how varying climate conditions might impact their business over different periods of time, from the immediate short term to several years into the future.

To maintain relevancy, these assessments should be updated regularly and their insights should be integrated into an organization’s overarching business strategy.

Define and manage climate risk mitigation and resilience strategies and plans

Addressing climate risk mitigation and building resilience are fundamental aspects of business operations in response to climate change. For instance, organizations operating in regions with prolonged extreme heat face significant risks to workers’ health, operational continuity and overall productivity. Without effective risk controls and mitigations, these climate conditions can escalate financial exposures.

To establish climate risk strategies, organizations should identify potential climate-related risks and vulnerabilities across their operations, supply chains and markets. Subsequently, they can develop targeted plans that incorporate mitigation and adaptive strategies, such as enhancing process resilience and operational efficiency.

Resilience strategies aim to enhance an organization’s capacity to absorb and respond to disruptions caused by shifting climate conditions. These strategies may include scenario planning, diversifying supply chains or investing in robust infrastructure capable of withstanding severe physical risks. Regular review and updates are essential to allow integration of climate resilience and maintain business continuity. Following are common risk mitigation actions that we have seen clients implement:

• Considering climate-related risks in the criteria for design and material specifications when planning and designing infrastructure, such as extreme temperature change and significant rainfall events when selecting materials resistant to severe climate changes.
• Investing in resilient infrastructure upgrades to better withstand extreme climate-related weather events. For example, in hurricane-prone regions, organizations might install wind-resistant windows on buildings to prevent damage during high wind events, or in regions experiencing prolonged extreme heats, organizations may install new indoor cooling systems.
• Focusing on improving energy efficiency by reducing energy consumption through better insulation, energy-efficient lighting, and optimized heating and cooling systems.
• Enhancing supplier resilience by seeking alternative materials from suppliers with lower carbon footprints. Additionally, diversifying supply chains prevents organizations from being overly reliant on climate-sensitive resources from a single geographic area.
• Providing employee training programs with a focus on identifying and adapting to climate risks. Additionally, implementing operational and workplace policy changes, such as adjusting work schedules to avoid peak heat hours or introducing heat stress programs, helps protect employees in changing climates.

In addition, climate resilience, a pivotal component of enterprise risk management (ERM) frameworks, allows organizations to manage climate-related risks to their business, operations, assets and workforce. Integrating climate resilience into ERM frameworks will inform organizations’ risk profiles and enable more informed decision-making on strategies and objectives.

Incorporating climate resilience into risk management strategies and plans allows proactive risk mitigation discussions within governance structures, leading to the establishment of measurable targets. The alignment between ERM framework and business strategy enhances overall performance by proactively managing climate-related risks.

When integrating climate resilience into ERM framework, organizations should consider the following:

• Assess, prioritize, quantify and routinely re-evaluate climate-related risks and opportunities across the entire value chain.
• Stress-test the evolution of the identified climate-related physical and transition risks and opportunities under future climate scenarios.
• Determine if climate-related risks are material using ERM framework and threshold, and develop approach to manage risks in alignment with documented controls and processes.
• Include climate-related metrics and targets in current and future risk management to make informed decisions on asset acquisition and expansion, products and services development, vendor relationships, business continuity, policies and growth strategy

By integrating climate resilience into its ERM framework, an organization can proactively address climate-related risks and leverage opportunities. This strategic alignment empowers organizations to maintain competitiveness in a dynamic market by fostering a culture of continuous adaptation and innovation in their current product and service offerings, with the goal of minimizing adverse climate-related impacts throughout their value chain. Moreover, this strategic alignment positions organizations to seize emerging market opportunities driven by global transition toward a low-carbon, climate-resilient economy.

By understanding how climate risks affect an organization’s business, customers and supply chain, they can identify market gaps where their existing products and services or new technologies could be advantageous. Additionally, they can anticipate potential supply constraints and recognize areas where regulations will drive demand for their new and existing goods and services.

Set climate-related goals and targets, and monitor progress

As customers become increasingly aware of the effects their consumer preferences have on the environment, an organization’s reputation with respect to climate resilience and actions is important. To enable a transition to a low-carbon future and embed climate resilience into strategic planning, business operations and future decisions, organizations should consider setting targets for their products and services around their GHG and air pollutant emissions footprint, waste practices, energy usage, product life cycle, asset management, business response and continuity, and supply chain and resource management.

Establishing defined climate-related goals and targets forms a strategic roadmap for future business success and climate resilience while demonstrating corporate responsibility. When organizations invest in projects such as asset expansions or modifications, it is important to assess the impact of climate-related risks and integrate climate resilience metrics and targets into every project phase.

By defining these goals, including decarbonization efforts, organizations actively support their climate ambition and enhance resilience for future climate scenarios. These goals and targets, such as GHG reduction efforts, are not only a part of prescribed metrics, as per industry standards (e.g., IFRS, ESRS), but they play important roles in addressing market, regulatory and reputation transition risks. Organizations should maintain transparency with internal and external stakeholders regarding their progress in achieving these climate-related goals, targets and overall climate resilience.

After setting targets, organizations should monitor their performance and progress in achieving their climate-related metrics and targets. Performance is measured by whether the climate-related actions, commitments or tasks were achieved or exceeded. An effective performance management program allocates resources efficiently and consistently evaluates actions against pre-determined targets.

Chris Bayer and Erin Feryo also contributed to this article.