Climate Change and Climate Risks: What Corporate Directors Need to Know

Coral reef

Businesses, and the corporate directors who oversee them, have a key role to play in accelerating climate action and driving the transition to a resilient, net-zero economy. 

Climate change threatens both the future success of businesses and the wellbeing of society. Corporate directors have the opportunity and responsibility to steer their businesses towards supporting climate resilience. To do so, directors must understand climate science, the risks and opportunities for businesses, and the actions needed to respond to them.

Climate science and impacts

The science is clear. Human activities like burning fossil fuels and deforestation are causing accelerated global warming. The emission of greenhouse gases into the atmosphere traps heat, warming the planet.

For the past 800,000 years, oceans, trees, and soils kept the climate steady by absorbing heat and storing carbon. But human activities emit so much carbon dioxide that the oceans, trees, and soils are having a tough time keeping up. As a result, the average global temperature has already increased by over 1 degree Celsius since 1880.

Carbon Dioxide Levels

Figure 1. Because of human activities, the level of carbon dioxide in the atmosphere has shot up higher than levels recorded in the last 800,000 years, leading to accelerated global warming (source: https://climate.nasa.gov/evidence/).

Already, the changing climate is having bigger impacts than expected. Hurricanes, floods, and other disasters resulted in over 200 billion US dollars in losses worldwide in 2020. As temperatures rise, so will the costs.

But these impacts are not shared equally. Climate impacts disproportionately threaten the Global South, Black and Indigenous communities, and people of colour. This is despite these groups having contributed the least to the climate crisis. The costs of adapting to climate change in the Global South are substantial, yet global inequalities challenge the capacity of these countries to respond. As a result, there is a growing call for businesses to play their part in addressing global climate impacts and injustices.

The warming globe

Figure 2. Climate models predict that in 50 years, nearly 20% of the planet could become an uninhabitable hot zone, with significant impacts on the Global South (adapted from https://www.nytimes.com/interactive/2020/07/23/magazine/climate-migration.html).

One response to climate-exacerbated inequities is the "just transition" movement. It is well recognised that the transition to a net-zero future will affect the livelihoods of a range of workers globally and the impacts and benefits won’t be equally shared: 6 million jobs in carbon-intensive industries are expected to be lost by 2030, while 18 million jobs aligned with the net-zero transition are expected to be gained.

Businesses can help advance climate justice by supporting worker re-training in sustainable industries, funding climate adaptation in remote and historically disadvantaged communities, and investing in nature-based climate solutions in partnership with local and Indigenous communities.

Climate risks

No business is immune to climate impacts.

According to the Task Force on Climate-related Financial Disclosures, there are two types of climate risks. Physical risks from changes in weather patterns and extreme weather threaten businesses' operations, assets, supply chains, and employee health. Businesses also face transition risks like regulatory and technological changes stemming from the transition to a net-zero economy.

Regulation and litigation both pose significant transition risks for business. As governments advance regulations to address climate change, companies will be required to adapt. Already, New Zealand has put in place mandatory climate risk disclosure with other countries sure to follow. Litigation over climate rights and liabilities is also on the rise, with companies facing lawsuits for violating their duty of care by ignoring climate risks, greenwashing, or failing to set emissions reduction targets that align with the Paris climate agreement.

More and more, the public, investors, lenders, and insurers are all calling on businesses to embed climate risks and opportunities into their strategic planning and decision-making. And a growing number of investors and banks are committing to transform their portfolios to reflect and finance the net-zero transition.

Climate risk oversight and opportunities

With the growing awareness of climate impacts comes a shift in societal expectations with respect to a corporate directors' duty of care.

To uphold their duty of care, corporate directors must be informed about climate risks and ensure their companies have articulated a credible response. This involves both climate mitigation (by investing in emissions reductions at an appropriate scale and pace) and adaptation (by addressing critical infrastructure).

As a senior leader or corporate director, you will want to ensure your company has a credible strategy. This includes setting emissions reduction targets in line with climate science and ensuring that you communicate a clear public position on climate change

But proactively addressing climate change also presents opportunities.

Leading businesses are already taking advantage of climate-related opportunities and helping us avoid the worst impacts of climate change by taking action to accelerate the transition to a just, resilient, and net-zero future.

Reducing your business' carbon emissions by switching to renewable energy can generate long-term cost savings. And investing in natural areas simultaneously enhances carbon storage, builds protection from extreme weather, and supports the health of employees and local communities. Leading businesses are identifying “no-regrets” adaptation measures like ecosystem-based adaptation approaches to flood defence that prove cost effective on their own merits. Companies are also developing and making use of innovative finance mechanisms, such as green or climate bonds.

And early climate leadership may help reinforce or even bolster your brand. Proactively responding to climate risks can bolster your business' reputation among an increasingly climate-aware public.

What next?

Corporate directors have a pivotal role to play to ensure their companies respond to climate risks and opportunities in a credible way. The Embedding Project's new guide on Climate Change and Climate Risk Oversight will equip you to do just that.

Now is the time for corporate directors to demand climate leadership. As a corporate director, you can play a leadership role by learning about climate change and its impacts and supporting the development of a credible climate strategy, a clear public position, and goals that support climate resilience.

The future of your business, our communities, and the planet depends upon it.