When a business leader walks into a boardroom, they know their presentation – whatever it is – will only get a hearing if it reckons with technological and geopolitical shifts. But there is another megatrend which also has the potential to make or break a company’s fortunes and too often is left off the list: the climate transition.
Business leaders too often see sustainability as primarily an issue for the future – one they engage with out of a sense of purpose or long-termism. Of course, it is important for those reasons, but if businesses approach through that lens alone, they are likely to miss the commercial significance of the changes we are seeing in the physical, regulatory and economic environment and what this means for their sector and supply chain today. As a result, companies can unknowingly pass up opportunities while needlessly putting value at risk. At the same time, innovation slows, adaptation falters and the power of business is not fully harnessed.
Five topics every business should consider
Taking a business-case led approach to the climate transition begins with understanding not only what value is at stake now, but where value is flowing and why. Climate change, and the efforts of government and business to address it, have set a staggering amount of business value in motion.
Each company will have a unique set of sustainability factors that link with its ability to create value. However, we’ve found that important opportunities and risks tend to be concentrated around five topics: value at risk, energy strategy, supply chains, regulation, tax credits and incentives. Not all will be relevant for every business, but there is often value hidden within these issues, ready to be discovered.
First, understand what value is at risk from the physical impacts of climate change, and how that is changing. For example, one global technology company decided to estimate its exposure to losses as a result of a disaster and found that the cost of a flood that the firm had experienced in 2020 would have been up to 50% greater in 2025. Quantifying the value at risk allows companies to make better decisions about business continuity and adaptation, protecting their assets and the livelihoods of their employees. CFOs will often be surprised at the extent of material financial risk present for their business in the short term – risk that needs to be managed like any other financial risk.
Energy strategy is another area of potential opportunity as the world’s energy system evolves. With energy demand continuing to rise and renewables expanding unevenly, forward-thinking business leaders seek to more actively manage the ensuing energy insecurity and pricing risk. Innovations in energy and digital technology are enabling businesses to expand into energy generation, which can support energy security and reliability while reducing costs and creating new revenue streams.
A third area of focus is supply chain. Geopolitical, technological and other shifts are already driving supply chain reconfiguration. As companies define their new operations it is important they consider the impact of climate on potential new suppliers. Companies that can operate comfortably today may be challenged as climate change takes its toll on physical infrastructure, people and resources. At the same time, evolving regulations can require companies to monitor or manage suppliers' environmental and human rights impacts. By proactively addressing these issues, CFOs can help to protect business resilience and meet compliance obligations.
Fourth, business needs to understand the rapidly shifting regulatory and data environment. Governments around the world are establishing laws and regulations to foster clean, resource-efficient and resilient economic growth. Complying with these directives, such as carbon and plastic taxes, is critical to avoid penalties and business disruption. In addition, regulators increasingly require businesses to report sustainability-related material risks, financial impacts, and management plans. Forward-thinking business leaders are embracing the opportunity to comply with these disclosures, not only to meet obligations but also to use the data they are collecting to make better decisions.
Finally, business leaders can drive value creation by accessing the tax credits and incentives available to help them finance investments and so drive growth and resilience. For example, China, the European Union, India, and the United States are expected to spend huge sums supporting clean energy in the next decade. Companies that tap into these capital flows can achieve cost advantages and accelerate innovation, while playing a part in global efforts to drive a just energy transition to net zero.
Where to start
The sheer amount of value being put in motion and at stake by climate change and associated factors – supply chain volatility, energy insecurity, shifting regulation and incentives – demands timely action by business leaders on behalf of their stakeholders. The starting point has to be the core language of business: identifying sustainability-related risks and opportunities and linking them to items in the P&L, balance sheet, and cash flow statements to create a materiality map. CFOs should then stress-test their financial projections under divergent scenarios for climate policy, the energy transition, and extreme weather.
Those business leaders who actively bring sustainability factors into decision-making and management processes will be in a better position to find opportunities to drive value and build resilience. And with better tools and data already available to do this effectively, the time for action is now.