When it comes to the climate emergency, we have two choices: either we work towards a planned transition or we face an abrupt transition, which would have characteristics of falling off the cliff. 

 

It is difficult to get excited about impacts which appear to be decades away but not only is this a “tragedy of the horizons” where our present (in)actions will conclusively determine future outcomes, but capital markets are forward looking and likely to price in climate risks well before its full effects are felt, as allocators of capital favour assets which are demonstrably climate resilient.

 

Investors need a high quality of analytics and disclosure to make informed decisions, this is also being viewed as a proxy to the quality of management. Across businesses and portfolios, considerable efforts are underway to determine carbon footprints and whether existing trajectories are in line with planned transitions. Regulators overseeing the stability of the financial system also emphasise the importance of toolkits such as principles-based taxonomies, stress testing and scenario analysis, which enable businesses to size and manage such risks.

 

 

It is clear that as long-term stewards of the business, boards of directors, most of which are dominated by non-executive directors in accordance with good governance, have a duty to manage such financial risks arising from the climate emergency.

 

Directors will be judged by the values of the future and in relation to the climate emergency, it will be difficult to claim ignorance of the enormous implications of the financial risks arising from this crisis, whether in the form of physical or transition risks. Some governments may be slow to respond with appropriate and effective policies, penalties and taxes, but when they do, the costs of doing business will increase, affecting viability and creating liabilities, also known as stranded assets.

 

 

The situation is more complicated with a less predictable climate as a result of global warming, with more frequent flooding and extreme heat days. More sophisticated modelling currently underway is alerting us that we have even less time than initially thought to arrest and reverse global warming. Human activity in the form of our addiction to economic growth combined with population growth has unleased multiple forces on the planet which are beyond our full understanding and predictive abilities. As the whole of economy transitions and decarbonises, what is initially considered as a risk will also be viewed as an opportunity. 

 

Thought leaders have been measuring the warming potential of their balance sheets; embedding sustainability into the heart of their business; publicly declaring targets to be net carbon zero or even more ambitiously, negative carbon emissions (i.e. actually taking in carbon); and pivoting strategies into new growth areas.

 

They want to be perceived as being part of the future. Do you?