How Climate Change is Shaping the Future of Business
This article is one in a series of updates from WRI’s Next Practice research team to highlight tools and guidance for developing corporate sustainability strategies. It builds on previous themes - Filling the Sustainability Innovation Gap and Mining Megatrends for Innovation - with examples of recent research and evidence that help build the business case for sustainability.
A recent KPMG report highlights ten “sustainability megaforces” that will shape markets in the decades to come. The list includes population growth, energy and fuel, ecosystems decline, and material resource scarcity, among others. These interconnected trends will create risks and opportunities for business. In response, companies need new strategies, particularly for market impacts relating to what KPMG calls the “megaforce” influencing all others: climate change.
Forward-thinking companies are starting to draw links between climate change and other major trends that impact business. Adapting for a Green Economy, a report released in June 2011 by WRI, the UN Global Compact, Oxfam and the UN Environment Programme, showed that many companies recognize climate change as a major strategic threat, as well as an opportunity. However, few have been able to design a strategic response or even fully explore how long-term climate risks will affect their markets.
Another recent report, the Carbon Disclosure Project’s analysis of FTSE 100 companies, found that nearly 80 percent view climate change as a substantive risk to their business. However, less than half of the companies surveyed had incorporated adaptive measures into their overall strategies so far.
For example, Ford Motor Company highlights climate change among the big trends shaping its strategy for future markets:
WRI’s work with companies on climate change has highlighted a need to turn information and awareness into strategic action and innovation (see below). Leading companies recognize that they will need new strategies and partners to effectively respond to climate change and other “sustainability megaforces.”
Key steps to consider in creating those strategies
Gather and synthesize information. There is a lot of data out there – new reports seem to come out each day with compelling insights about how trends are shaping future markets. Companies need ways to monitor and integrate this information, gathering input from various internal and external experts. Shared insights can inform more robust, long-term, adaptive strategies for climate change and other sustainability priorities.
For example, a business unit in a pharmaceutical company may be thinking about future market needs. It would be valuable to have a means of gathering input from a diverse set colleagues. The business can then benefit from insights not just on basic health trends, but also the implications of growing cities, information technology and logistics, climate change (e.g., increasing temperatures, air quality impacts), and related natural resource constraints (e.g., fuel costs, water availability).
Recognize threats, opportunities, and uncertainties. Climate change affects companies’ long-term business interests through both physical impacts (e.g., sea level rise, increased flood risk) and market impacts (e.g., growing demand for clean energy). As KPMG’s report emphasizes, companies need to think broadly about the external changes and identify climate impacts that directly or indirectly shape business risks and opportunities.
Consider the implications of increasing climate variability and weather extremes. Flooding in Thailand last year shut down production facilities for companies like Western Digital, a manufacturer of disk drives for computers. Other companies like Apple, Dell, and Intel, far removed from the flooding, felt the impacts as shortages and costs rippled through the global supply chain. In addition to risks, companies may also find opportunities to provide or invest in climate-resilient infrastructure solutions to help the region manage future flood risks.
Similarly, a company may not manufacture solar panels or wind turbines, but it can still find business opportunities with a growing demand for clean energy. Companies like Google are investing heavily to accelerate innovation and deployment of renewable energy, which helps reduce uncertainty for long-term energy supplies (and can provide a healthy return).
Find new partners and new ways to collaborate. Climate change and other sustainability “megaforces” are bigger than any one company, which means that finding both traditional and non-traditional partners is essential.
Companies like Ford make efforts to gather input from outside stakeholders and incorporate them into a materiality matrix. Ford is also working with a range of partners that include companies like Best Buy and experts at the University of Michigan and Georgia Tech. These partnerships have helped the company understand how climate change can shape future products, facilities, supply chains and customer needs.
Creative collaborations like this allow companies to identify and develop actionable strategies to address the long-term threats, opportunities and uncertainties.
If KPMG’s report is any indication, “sustainability megaforces” will shape how companies build and protect business value for years to come. Companies with innovative strategies and partnerships to tackle the challenges associated with climate change will be more resilient and can find opportunities to lead tomorrow’s markets.