pictured below: a small business in Florida experiencing flooding after a storm
Climate change has an unavoidable impact on businesses of all sizes. Climate change plans are often targeted at large companies. There are nearly 30 million small businesses in the United States that will be affected by and should be planning for climate change.
Climate change risks come in two forms: physical and transition risks. Physical risks include increased pollution, severe weather patterns such as droughts, temperature swings, rising water lines or floods, and increase in disease associated with pollution and changing eco-systems. Thus, climate change can cause damage to human healthy, physical property, and supply chains. Transition risks are risks to businesses or assets because of policy, legal and market changes as the world adapts to the physical risks posed by climate change.
Many business owners do not think climate change will impact their business or do not know how to what to do and thus have not planned. Your company should:
(1) Understand both types of risks
(2) Have a risk mitigation plan
(3) Prepare to disclose those risks
Why your business should care about climate-change (outside of the environmental consequences):
Investors Care:
This factor is perhaps most critical to businesses who someday want to seek outside finding. Large institutional investors like BlackRock and State Street have stated to the private companies they invest in that they will be asking for climate related disclosures. Those investors want to see that companies have a plan for both physical and transition risks or else their future is in jeopardy. Blackrock and State Street are not alone; in fact, 2020 was a historic year for investor resolutions on climate change. Investors in both private and public companies want to see that a company has a plan to adapt to evolving legislation and social mores as well as potential physical damage. Moreover, clean energy investments (think: Tesla) have skyrocketed over the past decade while companies relying on fossil fuels have remained stagnant or declined (think: Ford). Thus, if your company wants investors in the future, climate disclosures will likely be part of that process.
Insurance Companies Care:
A majority of US state insurance regulators expect all types of insurance companies’ climate change risks to increase over the medium to long term—including physical risks, liability risks, and transition risks. Thus, it is likely that insurers of all types will likely start requiring more disclosures from companies as well as requiring policy holders to create plans to mitigate climate change related damages.
The SEC Cares:
Recently, the SEC created the Environmental, Social, and Governance (ESG) taskforce and is in the process of drafting new mandatory disclosures for companies. It is expected these new disclosures will also create new causes-of-action against companies.
Regardless of the reporting status of your company, these new rules should serve as a wake-up call to business owners around the United States: the federal government will be taking climate change action.
Other Government Agencies and States Care:
On February 21, 2021, the United States rejoined the Paris Agreement, a worldwide pact aimed at mitigating global warming. As part of the Paris Agreement, the United States must regularly report its mitigation efforts. The Biden Administration has promised climate change related action.
Many states have created carbon-taxing, appliance, and energy laws, aimed at reducing carbon emissions. Many of these laws affect small businesses and this type of legislation is likely only going to increase in commonality as the world attempts to decarbonize.
Interestingly, if your business qualifies, it can apply for grants with the US Small Business Association to help find financial resources to make it more energy-sustainable and environmentally friendly. In fact, many government agencies offer grants for businesses engaged in climate-related innovation. These can be found here:
How Your Company Should Be Planning for Climate-Change
There are several methods by which a company can prepare for climate. Most notably is the Task Force on Climate Related Financial Disclosures (TFCD). The TFCD has identified four key management disciplines: governance, strategy, risk management, and metrics and targets. The TFCD is targeted at large and high-impact companies, such as banks, insurance companies, and asset managers as well as business sectors affected by climate like energy, transportation, and agriculture. Your company can elicit broad principles from the TFCD. With each of these metrics, you should be prepared to potentially make disclosures to your insurance company, investors, and perhaps even clients or customers.
Governance: Your company’s management should be actively monitoring its climate change risks. When creating a climate change plan, you should consider how often your board is apprised of climate change related risks and how the board will factor climate-change into its decision making.
Risk management: You should have an effective process in place by which you are monitoring your business’ risks, like new legislation or increasing insurance premiums.
As an example, a number of states require all new buildings to have electric car changing stations even if no employees have electric cars. Your business should be apprised of these types of changing laws, even if you think your business is unaffected.
Strategy: Strategy and risk-management are highly intertwined. Your business should have a strategy in place for identifying risks as well as mitigating the effect of climate change on your business. This means having a plan for possible disclosures to investors or insurance companies in addition to what your business plans on doing to mitigate climate change itself. Some ideas for mitigating climate change risks and damage can be found here: https://coolcalifornia.arb.ca.gov/tips
Metrics and Targets: Business owners should individually create goals to limit its own carbon footprint. You can do this by first calculating your carbon footprint here: https://coolclimate.berkeley.edu/business-calculator.
Photo Sources:
Union for Concerned Scientists: https://www.ucsusa.org/resources/encroaching-tides-florida-keys
American Council for an Energy Efficient Economy: https://www.aceee.org/press-release/2020/12/2020-state-energy-efficiency-scorecard
Getty images: https://www.radio.com/wbbm780/news/local/global-warming-likely-to-increase-disease-risk-for-animals
Sources:
Small Business Association Statistics: https://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf
Impact of Climate Change on Businesses: https://www2.deloitte.com/us/en/insights/topics/strategy/impact-and-opportunities-of-climate-change-on-business.html ; https://wittysparks.com/impact-of-climate-change-on-small-businesses/
Investing and Climate Change Disclosures: https://www.ey.com/en_uk/assurance/preparing-for-mandatory-climate-related-reporting ; https://www.forbes.com/sites/jamesphillipps/2020/09/27/climate-change-investing-may-not-be-your-thing-but-a-78-ytd-return-is/?sh=4d4d037c293b ; https://qz.com/1957979/blackrock-is-forcing-wall-street-to-take-climate-risk-seriously/ ; https://www.ssga.com/library-content/products/esg/climate-change-risk-oversight.pdf
Climate Change & Insurance: https://www2.deloitte.com/us/en/pages/financial-services/articles/insurance-companies-climate-change-risk.html
SEC ESG:
https://www.sec.gov/sec-response-climate-and-esg-risks-and-opportunities ; https://www.natlawreview.com/article/sec-turns-its-attention-to-climate-and-environmental-enforcement ;
ACEEE Scorecard and Policies: https://www.aceee.org/state-policy/scorecard
Task Force on Climate Change Related Disclosures: https://www.fsb-tcfd.org/
Zoe, this was a well-written and informative blog post. It is easy to forget just how much the climate can impact a business. Especially, in thinking about Texas for example that was impacted greatly with the recent weather. I really enjoyed how you not only identified the problem, but gave some solutions and things to think about.
Zoe, this was a very interesting post on an important topic. I really appreciated the use of photos to 'set the stage' for the content. I also thought it was wonderful to mention the possibility of grants with the US Small Business Association. Overall, I thought this was an interesting post on an important topic!