Connecting the dots: business risks and climate change

The relationship between business and climate change involves both risks and opportunities. Three risks, in particular, deserve close consideration as each of them highlights business opportunities for the future.

Transition Risks

What are they?

These are the business risks design and construction firms face related to changes in the policy and regulatory landscape; in other words, efforts to transition the economy from fossil fuel-based to a low carbon economy.

What is driving transition risks?

Last year, the US and other nations at COP26 made net zero commitments for the years 2030, 2035, and 2050. Now, we’re seeing an acceleration of policy and regulatory change at all levels of government to meet these targets related to:

  • Energy efficiency, e.g., improved energy codes, BEPS laws, and improved fuel economy standards;
  • Fuel switching, e.g., “electrify everything” movement in buildings and transportation; and
  • Emissions reduction policies, e.g., climate mobilization acts, climate solutions acts, embodied carbon laws, and zero carbon buildings.

There’s also a federal policy push through stimulus packages signed into law in 2021 to advance new clean energy technology development, including green hydrogen, battery storage, advanced nuclear, and carbon capture. Some federal lawmakers continue to aim for more in 2022.

With this policy and regulatory activity, the questions you should ask of yourself and your firm are:

  • How are you internalizing these in-demand changes?
  • How are you positioning your services to meet the demand for low carbon solutions?
  • Do you have the staffing and expertise to transition to new ways of designing and specifying materials and thinking about the built environment and the bigger role it plays in causing global warming?

If you’re not exploring these questions, your firm is at risk. Bottom line, we are living in times of great change and the market is going to reward firms that embrace the challenge; those that do not, risk missing enormous opportunities. Your firm should pause to consider:

  • Gathering your best and brightest leaders to take stock of the changes that are afoot;
  • Assessing the risks of change, including market demand to hit net-zero targets;
  • Emphasizing the expertise your firm can offer to effectuate the transition; and
  • Reflecting on the extraordinarily historic opportunity that has presented itself with massive amounts of federal funding through ARPA and IIJA for projects that meet climate targets and relate to sustainability.

Liability and Operational Risks

What are they?

These are the physical risks of climate change.

What’s driving liability and operational risks?

We know from a series of recent climate science reports from the Intergovernmental Panel on Climate Change that we can expect, with high degrees of scientific probability, more frequent and more severe climate-related weather events. Even in best-case scenario modelling on global warming, where the world pivots quickly to a low carbon economy this decade, the planet has rapidly warmed over the last 100 years, and the greenhouse gas emissions that have caused the accelerated warming cannot be removed at scale with the technology that we have today. While the global community works to slow temperature rise through less emissions, the global community faces increasingly severe weather events. Just last year, the US witnessed 20 separate billion-dollar weather/climate disaster events totaling $148 billion in costs.

With these climate risks in place, it would be wise to ask yourself these questions:

  • Do you have a process for flagging increased physical risks and the concomitant business interruption risks for your firm as a business and for your clients?
  • Do you have the expertise or do you partner with experts to help manage these risks on your projects?
  • Are you documenting those communications?
  • Are you protecting yourself from potential liability in your professional services agreements?

If your answer is “sort of” or “not really,” then it may be time to consider exploring these questions to protect your firm’s business and to help you better serve your clients.

What we’re seeing is a shift in climate-related litigation from a products liability framework to one where the allegations are framed around the concept that a business “failed to protect against foreseeable harms from increasingly severe weather events.” The best guidance we can give is to view all projects as having new exposures to the risks of climate change, the frequency and severity of which depend on geographical and locational factors. It’s also important to consider local hazard mitigation plans, adaptation plans, and disaster recovery plans. In other words, designing projects based on historical weather events is simply not enough. Assume that the weather of the past is NOT the weather of the future, especially when you consider that the future of any capital assets being put in place today have a service life of 50-75 years—a timeframe that will most assuredly suffer from more intense and frequent severe weather events.

Strategic Risks

What are they?

These are business risks that we’re seeing in financial markets that will likely impact project development, procurement preferences (public and private), and the future pipeline of work involving environmental, social, and governance (ESG) trends, which includes a recent proposed set of rules by the SEC on mandatory climate disclosures.

For those unitiated, ESG is an acronym for categories of issues that investors want public companies to factor into their business models and planning. Simply put, investors see the need to rebalance corporate purpose for long-term value using a sustainability framework/lens to measure and plan business success beyond traditional financial performance metrics.

An ESG mindset measures, accounts, and plans for climate uncertainty, biodiversity loss, water and air pollution impacts, resource availability, solid waste challenges, dignity and equality, community and social vitality, employment, and wealth generation, among other things. Such a mindset helps businesses:

  • Anticipate and mitigate transition risks;
  • Prepare for the disruptive risks related to climate-related severe weather;
  • Plan strategically for market opportunities and supply chain challenges; and
  • Optimize workforce satisfaction and attract high quality talent.

As a business, the question to ask is: what action is my firm taking today on ESG? If you’re not currently taking any action, now is the time to start learning and considering what actions to take because you don’t want to be caught flat-footed.

What is driving strategic risks behind ESG?

In short, the answer is demand by investors, and behind the investors, consumers, perhaps driven by changes in generational views. Aside from the reasons stated above about the value of ESG risk mitigation thinking, another reason to get this on your firm’s radar is the recent SEC action proposing that public companies disclose their climate risks, with the goal being to avoid catastrophic market failures (as we saw in the 2008 financial crisis). What this regulatory move does (if passed) is twofold:

  • Mandate public companies to disclose on metrics like greenhouse gas emissions (direct, indirect, and supply chain, which includes their professional services providers); and
  • Require reporting on how these companies are thinking strategically about reducing emissions (including plans and timelines) as well as documenting ways in which they plan to protect their capital assets against severe weather.

These trends and actions matter to the business community as mandatory disclosures and ESG reporting frameworks will influence procurement of ESG-friendly goods and services from private companies—a normal part of doing business. Notably, whether the SEC climate disclosure rules pass or not in the US, the momentum worldwide and pressure on public companies operating globally to transform their business models to account for ESG issues doesn’t appear to show any signs of relenting. To capitalize on this momentum and the need for public companies to report on how they are lowering emissions and managing their asset resiliency, it’s time for businesses to see the enormous opportunities.

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