The momentum triggered by COP26 at the end of last year has firmly set us on the path to a different type of economy, says Andrew Coburn, CEO, Risilience.
This ‘green economy’ is also being shaped by changing consumer expectations and sustainable behaviours. Consumers are shunning carbon-intensive products, such as meat and dairy foods, and switching to more sustainable alternatives, including plant-based substitutes.
For many organisations, meeting this change requires significant business transformation. The early adopters will be able to capitalise on the opportunities created by the sustainable economy, while any stragglers may struggle to remain relevant to their customers, in much the same way as brick-and-mortar businesses have struggled to compete with online competitors.
While new regulations are being steadily introduced, with the aim of incentivising sustainable behaviours, businesses must also work hard to stay ahead of the game and support transitioning consumer demands. Companies will play a critical role in nudging their customers towards more sustainable purchases.
The move to a green economy is not just an adjustment, it’s a step change. It impacts everything from the supply chains of products and the direction of new product development, through to a company’s ability to raise finance and its annual reporting requirements.
As a result, understanding and addressing the risk landscape, while responding to consumer demands, should be addressed hand-in-hand – and soon. Our analysis shows that organisations that fail to take climate risk seriously will see their value fall by as much as 30 per cent over the next five years.
Here we analyse the two main drivers for the green economy: an evolving risk landscape and changing consumer sentiment.
The voice of the people
In recent years, we’ve seen a shift towards consumers taking a genuine interest in a company’s sustainability credentials, and its track record of positive action. According to a Deloitte study, 34 per cent of consumers are choosing brands that have environmentally sustainable practices.
Furthermore, 28 per cent have stopped purchasing certain brands or products because they had ethical or sustainability related concerns about them. This trend is taking place across a range of consumer-facing industries, including travel, fashion, and food retail.
Organisations that fail to respond to this changing consumer sentiment may quickly see their revenues decline. In some extreme instances, climate change could undermine demand to the point that it makes a particular product, business or entire market unfeasible.
The risk landscape – what’s in view and what’s not?
Many businesses’ focus to date has been on the physical climate risks and how they will affect supply chains and operations. But since weather extremes and environmental changes are often viewed as future risks that might be impactful 10 or more years down the line – beyond the typical financial planning horizon – these risks aren’t burning issues for organisations just yet.
Most companies are in the process of understanding, quantifying, and adapting to these risks. But what businesses have yet to focus on are the potential near-term, transition risks associated with the transition to a low-carbon economy which, for most organisations, are a more imminent and impactful threat.
Immediate, transitional risks
If the world is to achieve the Paris Agreement goal of limiting global warming to 1.5°C above preindustrial levels, then the shift to a low-carbon economy will need to be fast and radical.
Take the price of carbon. Our analysis estimates that, to achieve the 1.5°C ambition, the global average cost of carbon will need to rise to at least $80 per ton of carbon dioxide (or equivalent greenhouse gases) by 2025 – a momentous increase from the current average of less than $5.
Given the prominent coverage of the green transition and climate crisis, organisations risk suffering severe reputational damage if they fail to keep up. One look at the headlines on any given day will demonstrate that this is a real and increasing risk for businesses, and woe betide any organisation that falls into the unwanted spotlight with accusations of failing to act and greenwashing.
Looking elsewhere, keeping up with changing climate-related regulations is of upmost importance for organisations. The threat of non-compliance and financial penalty is the clear motivator, but upcoming legislative deadlines gives businesses an opportunity to get on the front foot and be proactive in their approach to the green economy.
It isn’t an overnight action. There’s no magic for button that will suddenly make companies compliant. It takes an enterprise-wide initiative to address the different moving parts, from evolving government policies to industry disclosure standards, but if they start earlier enough, organisations can avoid racing against the clock.
Taking the green leap
It’s clear that transitional risk is going to be the short-term propellant of change for businesses. Climate change is predicted to cost organisations $1.26 trillion by 2025, clearly demonstrating that the impact of this crisis will hit home much faster than some companies anticipated.
Promisingly, businesses are starting to move in the right direction as the green economy takes hold. Accelerating their general understanding of the full range of physical and transition risks will not only enable comprehensive mitigation plans, but also bring into sharp focus the extent of the business transformation needed.
Ten years from now there will be casualties of the green economy – of this we have no doubt. The Blockbuster Video or Kodaks of tomorrow, who fail to see the writing on the wall, are up against the Netflixes of tomorrow, who grasp the opportunities created by this seismic change.
To avoid being marked down in the business obituary, organisations need to understand their risk landscape – and act with confidence.