More people are demanding that businesses take stock of how climate change could impact their bottom lines. A recent analysis by CDP (formerly the Carbon Disclosure Project) shows that many companies are listening. According to CDP’s assessment, many of the world’s largest companies reported climate change could significantly impact their businesses within the next five years.
CDP, an international nonprofit, maintains a global disclosure system that allows companies to measure and manage their environmental impacts by voluntarily reporting environmental data. In 2018, over 7,000 companies disclosed environmental data to CDP. CDP asked companies, for the first time in 2018, to calculate the financial implications climate-change risks pose to their businesses. This growing participation signals that companies are concerned with impending climate change impacts on their financials and see value in disclosing this information to CDP.
Roughly fifty percent of the companies reporting to CDP identified climate-related risks that could substantively impact their businesses. Moreover, 215 of the world’s largest companies disclosed that potential climate change impacts put almost $1 trillion at risk. Over half of these risks were reported as likely to occur within the next five years. Companies also reported that a significant portion of assets, totaling $250 billion, may need to be written off due to climate change.
According to CDP’s analysis, the two most recognized causes of financial impact are increased operating costs, including greater compliance costs associated with greenhouse gas emissions pricing, and reduced revenue from diminished production capacity due to the physical effects of climate change.
One factor driving the world’s largest companies to disclose this climate-related information is an increased scrutiny by stakeholders regarding climate-related issues. Additionally, many of these large companies are concerned with the reputational risks posed to their businesses in not addressing climate-change risks and impacts. As a result, more companies are taking a proactive stance in assessing and disclosing climate-change risks.
CDP acknowledged that many companies are not reporting their potential climate-changes risks. Moreover, many of the companies disclosing this information struggle to adequately assess the potential financial risks posed by climate change. For example, some companies only evaluated potential climate-related risks to their direct operations and did not include potential impacts to supply chains. CDP suggested companies and investors should account for these factors and broaden their climate-risk assessment methods to remain profitable in the future.
Companies headquartered in Europe are far more likely to identify substantive risks and opportunities linked to climate change, according to CDP. This is partly due to the fact that local regulations often require European companies to do so. However, companies headquartered in the United States, Brazil, Mexico, Argentina and Chile were less likely to report these risks. Due to the inconsistency in disclosures across countries, a full assessment of the potential financial effects of climate change globally is extremely challenging.
CDP suggested that investors and policymakers focus on driving improved climate-related risk assessment by U.S.-headquartered companies in particular. CDP argued that this is an important step because U.S. companies are the largest national group in the world’s biggest companies, but only represent an estimated ten percent of the financial risk reported to CDP.
On the other hand, many companies see the changing climate as a financial opportunity. In fact, 225 of the world’s biggest companies identified over $2 trillion in potential financial opportunities from climate-related impacts. According to CDP, the potential value of these sustainable business opportunities ($2.1 trillion) is nearly seven times the cost of accomplishing them ($311 billion). This finding demonstrates that the transition to low emission products and services presents significant business opportunities.
Overall, CDP revealed that climate change poses significant financial risks as well as considerable potential benefits to the private sector.
More information on CDP’s report can be found here.