Climate Risks and the “What-ifs” of the future – Introduction for organizations

The following article is divided into two parts. The first part introduces the latest findings on global risks including climate change and what organizations must do to be better prepared.

Current Situation

The recently released Global Risks Report 2023 by the World Economic Forum, highlighted the top 10 risks expected to occur over short-term (2 years) and long term (10 years). Based on the global risks perception survey, it can be seen that five out of the top ten global risks were in the environmental category relating to the impacts due to climate change as well as climate mitigation and adaptation.

Polycrises or cascading risks across multiple categories are also inevitable in the near future. What needs to be understood is that addressing the risks due to climate change will not just affect the environmental risks category but as well as impact the risks under other categories which is made clearer by the interconnections between various risks shown below.?

The impact of climate change and global warming results in cascading effects which not only result in physical damage but also cause health challenges and economic and financial losses.?

Climate change is already in progress and there is a rapid requirement and necessity for climate action. According to UNEP (2022) and Climate Action Tracker, the world is on track for a temperature change of 1.8°C which is the best-case scenario provided all targets are reached along with additional net-zero commitments. Current policies will lead to a warming of 2.7°C and will also continue to rise after 2100. Based on the 2030 NDCs targets only, the end of the century will be 2.4°C, with over a 95% probability of exceeding 1.5°C. If one includes binding long-term targets, the end-of-century warming was estimated to be 2.0°C, which is likely below 2.2°C and has over a 90% chance of exceeding 1.5°C.

The above projections emphasize the fact that to reach the 2015 Paris Agreement goal of keeping global temperatures within 1.5°C, which is nearing the point of impossibility, drastic transformation towards a low-carbon or net-zero economy is required. This transition is already underway in many of the major sectors including industrial, buildings, and transportation but still needs to move at a much faster pace. A transition towards a net-zero and/or a low-carbon economy has to take place across all sectors, all levels of society and all departments of a business.

Businesses play an important role in emission reductions, and energy reduction as well as in handling the economics and finances of any economy. The complex and evolving nature of climate change makes it not just a physical problem but also crucial in financial and economic decision-making for an organization. Climate change also has adverse impacts, short-term and long-term, across all levels of business and may impact the ESG rating of organizations. Changes in climate policies, new technologies and growing physical risks result in reassessments of the values of virtually every asset. For strategic decision-making on handling?existing and future risks and opportunities and improving their resilience, “Scenario Analysis” is a useful tool for businesses.

What is Scenario Analysis?

According to https://www.tcfdhub.org/scenario-analysis/

In short, scenarios provide hypothetical “what-if” situations of the future that provide insights for businesses so that they are prepared for risks and opportunities and make decisions accordingly. However, the concept of scenario analysis is not new and has been used for quite some time by government planners, corporate managers and military analysts as powerful tools to aid in decision-making in the face of uncertainty. In the context of establishing resilience against the impacts of climate change, climate-related scenarios allow an organization to understand how climate risks (physical and transition) and opportunities of climate change might impact the business over time. While an organization hope for the best-case scenario, a smart one prepares for the worst-case scenario also. Therefore, the best scenario analysis is the selection of scenarios that cover a reasonable variety of outcomes, favorable and unfavorable. Scenarios have the following characteristics.?

The Task Force on Climate-related Financial Disclosures (TCFD) has developed a framework to help public companies and other organizations more effectively disclose climate-related risks and opportunities through their existing reporting processes. According to TCFD benefits of better disclosure include effective evaluation of climate risks to not just the organization but also its suppliers and competitors, better decision-making on capital allocation and improved strategic planning to adapt to short-, medium- and long-term climate risks.

The next part will focus on the process and the steps taken in conducting scenario analysis and the challenges and benefits of scenario analysis for an organization.

Net Zero Think, a climate-focused service provider is providing climate change impact assessment for different climate scenarios to help organizations understand climate risks and become more climate resilient. To know more, send an enquiry to [email protected] or visit www.netzerothink.com

Author: Dr. Kruthika Eswaran (Lead Consultant for Climate Change Impact Assessment)