Climate change is shaping corporate strategy

The extreme weather events we are experiencing, rising temperatures, uncontrolled fires, devastating storms, and variations in sea level are affecting our personal lives and will increasingly affect our professional lives as well. When we talk about climate change, we think of decarbonization, sustainability, energy transition, new infrastructures, electrification of transport, buildings and industries, renewable energies, reforestation, and circular economy. All of this impacts our companies and forces them to make significant changes, because the value of their assets in the coming decades will depend on them.

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Executive committees and boards of directors must make increasingly complex decisions related to climate change. To this end, it is important that they map key issues and classify them into two levels: strategic and operational, avoiding focusing on just one. And to achieve this, it is important that its members combine their knowledge and experience as experts on specific issues, but also as managers who have a global vision: Where to start? What are the questions to be answered?

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At the operational level, logistics is suffering greatly from climate change; costs have increased due to the obligation to comply with new regulations; insurance prices have risen; and consumer preferences have evolved towards more sustainable solutions. The infrastructure of many companies has become vulnerable to increasingly frequent hurricanes, fires and floods. There are areas of the planet where operations are no longer possible because of heat or too much or too little water. And the prolonged drought is generating long waits of up to nearly a month in the Panama Canal. Some countries are at risk from rising sea levels, such as the Netherlands or islands in Southeast Asia, which may become less attractive destinations for investment. Some companies, such as breweries, need clean water to be able to produce and, faced with a decrease in their capacity to operate in certain areas, are being forced to make strategic changes, such as relocating their production units. Other companies are particularly affected by rising energy costs, which are essential to maintain the temperature of their production structures; an example of this is the data processing centers, which need to operate at low temperatures. And the change in the energy mix and decarbonization are adding pressure to these costs. All these issues are slowing down production and service delivery for many companies.

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We therefore see that the impact of climate change on the operations of many companies is leading them to rethink their strategies. One of the sectors that will be particularly affected in the long term is tourism. Many companies in the sector must rethink their location strategy because in some regions of the planet the heat will be so intense that hotels will not be able to operate in summer. There will be greater migratory movements due to the impossibility of operating in such high temperatures, and some countries will become more attractive than others, which will lead to changes in their long-term growth potential. It would not be surprising if vacation dates end up changing both for students and their families. If that were to happen, then the tourism positioning of each country would have to evolve, and new leaders would emerge for the spring and fall seasons. Starting to think about scenarios and knowing how to position companies and countries to win in the long term is the basis of strategic thinking.

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We are all aware that achieving the Sustainable Development Goals is vital if we want our planet to survive, and this requires new regulations based on the agreements reached by countries, but it is also clear that these entail an additional cost for companies, which must create new production processes or readapt current ones, and it is not always possible to pass these costs on to customers. In such cases, they will end up having an impact on operating results.

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Society has changed and consumers, especially the new generations, are increasingly sensitive to emission reduction policies and tend to favor companies with sustainable practices. There is therefore much work to be done: analyzing environmental risks, incorporating sustainability policies into decision-making, adapting infrastructures to make them more resilient, changing the energy production mix and being vigilant in understanding how the expectations of regulators, customers and consumers are evolving. Climate change will drive our companies to turn their strategies into unique new ways of competing. Differentiating the offer based on sustainability, innovating with product portfolio, complying with new regulations, effectively managing risks, optimizing resources and creating plans for greater resilience in the supply chain will be key.

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The companies that integrate climate change into their strategic thinking will be more likely to be successful in the long term, generate new business opportunities, new segments and new ways of creating value.