The Paris Agreement in 2015 was a wake-up call for many companies around the world. Signed by nearly 200 parties, global leaders made a pact for climate action to limit the average global temperature increase to well below 2 degrees and pursue efforts to achieve a 1.5 degrees Celsius temperature rise by 2100, compared to pre-industrial levels.
Climate action can be a daunting and broad topic for corporations to tackle, and knowing where to start is difficult. Environmental action often falls further down a company’s priorities because it may not seem to affect their day-to-day. But while a company may not feel its operations are affected by climate change, a business’s bottom line can see surprising benefits through climate action.
Many companies fail to realize that climate change directly affects business. According to Co-Founder and Chief Sustainability Officer of Unravel Carbon, Marc Allen, “Climate change, at its heart, presents a very material risk to ongoing business longevity and performance.” In Asia-Pacific, more companies are taking climate action and taking pledges to reduce their negative impact on the planet.
Through research and conversations with customers, we found some of the most impactful benefits of climate action for businesses to be addressing disclosure pressure early, mitigating climate risk, facilitating business growth, reducing costs, and optimizing business operations.
1. Preemptively Address Disclosure Pressure
Disclosure pressure, or pressure from shareholders and stakeholders to disclose climate performance and financial exposure to climate and ESG risk, is a material business risk associated with climate change. According to S&P Global, the voluntary disclosure rate for Scope 1 and Scope 2 emissions is rising across nearly all sectors. There has been a surge in government regulations regarding ESG disclosures in the past few years, such as the Mandatory Climate Risk Disclosures and the Corporate Sustainability Reporting Directives (CSRD). It is in large part a response to the Paris Agreement and parties being required to submit an accurate Nationally Determined Contribution (NDC). Parties started competing in the Race to Zero Campaign, and governments have started setting some regulations because they require more accurate information to set their climate contribution goals.
The U.S. Securities and Exchange Commission (SEC) has taken steps to work towards a comprehensive Environmental, Social, and Governance (ESG) framework; the framework will help companies produce reliable and consistent data. ESG has become a movement and business strategy, one quite similar to the digital revolution. By ignoring this movement, companies risk falling behind and losing support from their stakeholders. ESG disclosures, which may soon become mandatory, provide more accurate data relating to sustainable impact and help to avoid miscommunication or false advertising. However, they could also expose companies to greenwashing risks.
Companies should not only mitigate regulatory and business risks associated with climate change but also the associated costs of those risks. The biggest associated business risk is the cost of penalties. Governments have started taxing the biggest emitters of carbon to shed light on a huge climate issue that is otherwise invisible. For example, the National Climate Change Secretary (NCCS) announced that the carbon tax in Singapore is increasing to $50-80 (SGD) per CO2e tonne by 2030. Businesses must consider how a carbon tax may affect them and plan to fit decarbonization methods into their budget.
With Unravel Carbon, companies can get ahead of disclosure requirements by starting their decarbonization journey.
2. Mitigate Climate Risk
Some of the many risks associated with climate change (including regulatory, social license, technology, market, legal, etc.) are physical and investment risks. Companies are expected to understand the climate risks associated with their business; it exemplifies responsibility and preparedness for when preventative policies are in place.
Physical climate risks are consequential for businesses and include risks to upstream supply chains, downstream access to markets, and company facilities and operations. For example, an upstream supply chain risk would be if cotton fields experience flooding or drought. The cotton supply would decrease, and the cost of cotton sourced from those fields would inevitably rise. Numerous other crops, including wheat, soy, and cocoa, are vulnerable to temperature fluctuations resulting from climate change, not to mention the climate dangers of monoculture fields and excess fertilizer use.
Physical climate risks can directly affect downstream operations, too. Distribution and transportation are particularly vulnerable to physical climate risks such as extreme weather events, which are becoming more common and more intense. Transportation of temperature-sensitive goods can also be affected by the increased temperature fluctuations associated with climate change.
Furthermore, company facilities can also be at risk for physical damage. For example, hurricanes, flooding, and other severe weather events are occurring more frequently now than before. Mitigating physical climate risk for any supply chain, and ensuring you have sustainable sourcing and backup plans is a must.
Stable access to capital is a financial advantage of decarbonizing. Investors want to invest with confidence, and they are becoming more climate considerate because it impacts the bottom line. Investors look at the long-term viability of businesses. There has been a significant shift towards sustainable investing, especially since the COVID-19 pandemic. According to Bloomberg Intelligence, global ESG assets are predicted to surpass $41 trillion by 2022 and $50 trillion by 2025. Investors can feel more secure and relieved when they are given ESG disclosures and see mitigation plans in place.
Fidelity reported that in 2020, ESG leaders saw 23% higher returns compared to the broader U.S. market. Their report also found indicative evidence that stocks with higher ESG ratings are more protected against stock market volatility. The ESG premium survey done by McKinsey Sustainability reported the possibility of high investor premiums. Investors revealed a willingness to pay a median 10% premium to acquire a company with a positive record on ESG, with 25% of respondents saying they would pay a premium of 20%-50%.
3. Grow Their Business
According to Harvard Business Review, products labeled as sustainable grew 5.6 times faster than products without sustainable labeling. Furthermore, research conducted by IBM and the National Retail Federation shows that more than 70% of consumers self-reported that they are willing to pay a premium for a brand with clear and clean traceability. While purchasing actions don't always mirror this data, it does show a strong concern by consumers for the environment, and they want the companies they support to care, too! They are drawn to corporations that have proven their commitment to sustainability.
Businesses taking climate action are better positioned to attract new workers and retain the ones they have. There is an increasing shift in the workforce: employees want to work for companies committed to bettering the causes they care about. A survey done by Fast Company found that nearly half of millennials would take a pay cut to work at a company that takes sustainability seriously. At Unravel Carbon, we predict that in the years to come, more employees will become environmentally conscious and inquire about their company’s net zero goals and plans - and those of potential employers.
Another benefit businesses can reap from decarbonizing is attracting business partners. Evidence suggests that principal buyers are including ESG and climate change metrics as part of procurement decision-making and setting minimum performance criteria for participation. More and more companies are committing to SBTi targets, which require deep collaboration with supply chain players to decarbonize. Supply chains can produce more than four times a single company’s emissions, so working with suppliers is crucial to cut down on unnecessary costs. KPMG Sustainable Futures reveals that 73% of CDP members expect to deselect suppliers based on environmental performance.
Find out how Unravel Carbon can help your company pursue new growth opportunities.
4. Reduce Costs & Optimize Operations
Beyond enhancing a company’s reputation, decarbonizing has other immediate benefits, such as cost reductions and operational efficiencies.
There are many direct costs that impact the bottom line. For example, Singapore has recently introduced a carbon tax that taxes companies for each ton of carbon emitted. This was purposefully set at a relatively low price of $5/t CO2-e for companies to become accustomed to reporting emissions and paying tax on them. However, at the beginning of 2022, the Singapore Government announced this price would be raised to 25/t CO2-e in 2024, with the potential to reach $80/t CO2-e in 2030.
Companies can explore reducing their energy consumption as one of the main ways to reduce their carbon footprint. They can also opt for renewable energy sources, which are steadily decreasing in price, and there are government incentives that make investing in cleaner energy even more attractive. The savings from using renewable energy are likely to continue growing over time. Opting for renewable energy also shelters organizations from the economic impacts of a volatile market where high fuel prices tend to reduce profit margins.
Decarbonizing can also lead to operational efficiencies. Some examples include saving money through the reduction of waste, lower electricity bills with the adoption of energy-efficient solutions, and the optimization of supply chains.
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In this post, we’ve seen the many benefits for businesses in taking climate action. It enables them to grow their business and strengthen their operations. Embarking on their sustainability journey opens up new opportunities in a low-carbon economy and helps them mitigate risks.
As a result, climate action is climbing up the priority list for businesses. Doing good is no longer only good for the environment, but it’s also good for business.
Interested in taking action but don’t know where to start? Get in touch with the Unravel Carbon team.