Publication

An opportunity to build more competitive and resilient companies

April 20 2023
Mauren esquivel

World Earth Day is celebrated on April 22, an important date to reflect on the importance of the planet as our home and the influence that human beings have on it. On this day, it is crucial to consider the role of companies in the challenge of climate change, the main threat facing our planet.

Climate change will affect people and countries unequally, concentrating mainly in those places where there are less infrastructure conditions and basic services. In general, infrastructure will become increasingly vulnerable if changing climatic conditions are not taken into account in its design. According to the report of the Intergovernmental Panel on Climate Change (IPCC, 2022), between 3,300 and 3,600 billion people live in contexts that are highly vulnerable to climate change, which will affect their physical security and quality of life.

Globally, climate change is considered one of the main threats. The results of the global risks report of the World Economic Forum (WEF) indicate that extreme weather events and the lack of action to mitigate climate change are two of the five main risks for the next two years. The first four risks identified in the next 10 years are related to climate change.

In business, there is increasing awareness about climate change and the need to take action on it. There are at least three approaches to how companies face the challenges of climate change: do nothing since they consider that it is not a business matter; a risk management approach; and the third, an approach that combines risk management with the search for opportunities.

The first option is the possibility of adopting a passive attitude and continuing with business in a traditional way. However, this passive approach carries risks, such as market loss, especially in more sophisticated markets that require greater commitment from companies. In addition, investors are increasingly considering environmental and social issues as decision factors when investing, which could lead to higher capital costs for companies that do not adopt climate policies and strategies.

Under the risk management approach, companies identify risks and formulate mitigation strategies. The physical risk is the most obvious, since they originate from the immediate threats generated by climate change, such as the interruption of the company's operations due to natural phenomena that are increasingly common. The second type of risk that should be examined is transition risk, which is related to the potential cost to companies of adapting to changes in policies, laws, and other regulations. A third type of risk is liability, which arises from a failure to mitigate, adapt, disclose, or comply with changing legal and regulatory expectations.

Identifying the risks that the company faces is the first step. Once this process is complete, they must be analyzed internally and an effective risk management and mitigation strategy developed. Weather risks should be viewed as core business risks, and their mitigation should be part of the overall business strategy, not an isolated element of business activity.

Climate change attention provides new business opportunities. The review of processes to reduce emissions or manage risks can identify "new ways of doing things", reduce the use of materials or energy, the same occurs when analyzing from an adaptation point of view. There is also the possibility of developing products that contribute to providing solutions to the climate emergency by opening new markets in which the company does not currently have a presence or serving niche consumers sensitive to the issue.

When we consider the complexity of the strategic decisions that companies must make, we understand that these decisions must start from the highest level. There is an opportunity to generate higher performance in the medium and long term, while the current business model is identified, evaluated and managed, while investing in and transforming the business model thinking in the medium and long term.

This is not an automatic process, it requires a strategy that incorporates sustainability elements as an essential part of the business and the involvement and commitment of the different areas of the company. But developing products, reviewing processes, are typical characteristics of a culture of innovation, and climate change can enhance its development, and contribute to creating competitive advantages that make us a better company.