Businesses must look at climate transition more holistically - upside risks from climate transition provide opportunities for organisations who can adapt their business model
Aon’s latest Weather Climate and Catastrophe Insight report presents stark statistics on the nature of climate change and the economic and insured losses piling up from natural perils like hurricanes, flooding and wildfire. Although not the worst year for financial losses, 2020 was still record-setting in the US with the costliest severe weather season ever, and a record number of acres burnt. Elsewhere, parts of South Asia saw some of the worst monsoon flooding in many years, while Europe experienced its costliest winter windstorm in nearly a decade and parts of South America suffered drought conditions.
Despite the downside risks that the increased frequency and severity of climate perils represent to businesses, there are reasons for organisations to be optimistic. That optimism depends, however, on shifting from an inward mindset that focuses purely on internal sustainability related targets such as net zero carbon emissions and recycling – important though they are – to an outward mindset that pursues a more holistic approach to climate transition; an approach that will allow their business models to adapt and evolve to work with the possible opportunities.
Building climate resilience is of course important. Businesses should look at how they can mitigate local issues that might come from increased exposure to natural perils, such as ensuring their buildings in hurricane zones are able to withstand certain levels of wind, or by avoiding areas prone to flooding. But going beyond these measures – and given there is an inevitability to climate transition regardless of what humans can do to limit carbon emissions – it’s about looking at overall preparedness, the decisions businesses are making and how they’ve factored in climate whether it’s related to the risk or the opportunities, and how they’re disclosing and reporting around their climate exposures with more confidence.
For example, we initially started to work with banking clients around their stress testing for climate change and how it would affect their loan books, capital requirements and their future lending criteria. From there we have started to do similar exercises for real estate companies which has naturally evolved to include pension funds given their role as big institutional investors. We’re now seeing retail and food and beverage businesses also taking a more holistic look at climate transition by considering the supply side impacts.
In turn, such exercises can offer up new commercial opportunities when it comes to pivoting activities to work with climate transition. Obvious ones – already being seen – are energy companies turning away from fossil fuels to renewables. But what about other industries such as retail, where a supermarket running a huge logistics operation, could sponsor or invest in electric vehicle charging points at service stations, laybys or their own carparks? Firstly, it helps transform their own vehicle fleet away from fossil fuels, but secondly, it also delivers huge brand benefits.
A more outward focus on climate transition
At its heart, this approach is concerned with having a wider and more outward focus when it comes to considering climate transition. To start that process every business should be asking climate related questions of its customers, investors, suppliers, the government/regulators, as well of its own organisation. The purpose of such an exercise is not just about discovering the impact that the company is having on the environment, but also what impact climate transition is having on the company and its operating model.
These questions can be wide-ranging: has the business spoken to its customers about climate change in the last six months? Have suppliers developed any contingency options in response to climate events? Is the board aware about D&O risks from climate related liability exposures? Has the business considered how future climate/environmental legislation directly related to the organisation might affect products, suppliers, and customers?
At Aon, we have designed a set of questions around each stakeholder group: questions which are designed to identify a business’s climate transition awareness. It can play a central role in moving business awareness from an overly inward focus on sustainability and their immediate environment, to a more holistic approach that embraces their overall business model.
Secure a long-term future
As an industry and as a broker, our job is not just risk identification for clients related to climate transition; it’s also helping organisations to adapt and identify opportunities to develop their existing models and develop new areas within their business. Climate transition is going to happen. So, the vital first step is to begin to understand how an organisation can identify and quantify the negative impacts, but then identify and pursue the opportunities of climate transition that could help many organisations secure their long-term future.
To find out more about the changing climate and ways to build resilience and transfer risk, download Aon’s Weather Climate and Catastrophe Insight 2020 Annual Report