Climate change poses serious risks to companies and not just those with asset-heavy supply chains. Even the most flexible, digital professional services companies may be vulnerable.
Thus, all companies need to understand the risks posed by climate change – as well as the opportunities. Companies that prioritise climate risk management will be better positioned to withstand its effects and capitalise on new opportunities.
What are climate risks and opportunities for professional services firms?
We often think about the threat of climate change to resource-intensive businesses, such as droughts disrupting agriculture or rising sea levels threatening real estate. But professional services firms are no exception.
The risks of climate change are increasingly well-understood, especially with the development of market-focused initiatives like the Taskforce for Climate-related Financial Disclosure (TCFD). In this context, climate risks are the financial risks linked to climate change.
Framed by the TCFD, climate risks can be understood in two categories: physical risks and transition risks.
Source: TCFD, 2017
Physical risks come from extreme weather events or long-term shifts in climate patterns. For services companies, these risks most directly threaten supply chain disruption. Even companies that do not produce goods are dependent on other manufacturers, such as IT equipment or electricity. One recent example was the semiconductor shortage affected by the drought in Taiwan.
Physical risks can also affect operations, such as IT infrastructure, transportation, and employee safety.
Transition risks result from the regulatory, technology, or market changes made to mitigate or adapt to climate change. Examples include new reporting requirements, changing demand for services, and reputational risk from not contributing to a low-carbon economy.
Understanding these risks to your business or your clients can create opportunities. Particularly for professional services firms, opportunities come in the form of new market offerings and operational efficiency. For example, firms can help clients prepare for new regulatory requirements, like ESG report preparation, scenario analysis, green finance, or energy and waste reduction.
Firms may also recognise opportunities to improve their operational efficiency. For example, by reducing travel, firms not only reduce emissions and costs, but can also offer a flexible working model that is highly desired by new talent.
Why should companies understand these climate risks and opportunities?
It can be difficult to assess climate risk for professional services firms without a clear supply chain. Nonetheless, we can see there are clear risks and opportunities posed by climate change to companies of all industries.
Risk assessments can mitigate costs, demonstrate compliance, improve reputation, and identify new business opportunities in a changing market.
These assessments may also be required. The European Union and the United Kingdom have both enacted mandatory disclosures for large companies. Even if not required by regulation, small or medium companies may be asked for similar disclosures by their large clients. Additionally, a growing number of investors expect companies to demonstrate their mitigation strategies for climate risk.
According to a 2021 study by KPMG, only 50% of technology companies acknowledge climate risk in their reporting, even though 83% report on sustainability. Understanding the risks posed by climate change is critical to effectively managing this transition. By undertaking a climate risk assessment, companies demonstrate a serious commitment to employees, customers, and the public, while outpacing competitors.
How can you assess climate risks and opportunities across the business?
Companies can identify these climate risks and opportunities through a climate risk assessment. Much like other risk assessments, climate-related assessments involve mapping internal activities, understanding external forces, and identifying where the two interact.
Many reporting frameworks and standards offer risk assessment guidance, such as TCFD, Carbon Disclosure Project (CDP), or ISO 14091. Companies can choose depending on their reporting standard of choice – read more about selecting the right reporting standard here.
Regardless of the standard chosen, climate risk assessments generally look as follows:
6 climate risks and opportunities assessments
1. Educate management on climate change
Take time to ensure management understands climate change and why it is relevant for the business. Employee training has many benefits, including talent attraction and retention.
Specifically for climate risk, training helps establish the senior leadership buy-in necessary for a successful ESG program. Training also ensures managers have the right language and knowledge to identify climate risks and opportunities within their domains, contributing to a more thorough assessment.
2. Determine the scope of the assessment:
Comprehensive climate risk assessments can be time-consuming, so larger organisations may choose to segment the task by line of business or geography. Smaller organisations can conduct assessments that take the entire operation into account.
3. Understand business activities and the value chain:
Map out business activities, including all products and services, clients, locations, and procurement.
If the company has already done a carbon footprint analysis, this is a great starting point. It already indicates the physical flows and serves as a catalogue of climate-affected activities.
4. Gather data on external forces:
Once the business activities are understood, gather data on the external forces that influence physical and transition risks.
This data can come from, for example, scientific sources (e.g., the IPCC), industry publications, and the news. Many standards and frameworks also provide material points for companies to consider, depending on their sectors, such as SASB’s industry-specific disclosure topics.
Some examples include:
Physical risks:
- Historical weather data or predictions for office locations or those of suppliers and customers
- Data on the readiness of the region to adapt to extreme weather, such as airports, road connectivity, electricity, and food supplies
- Business resiliency data, including the organisation’s disaster recovery plans, alternate suppliers, and remote work capabilities
Transition risks:
- Enacted or expected climate-related regulations that affect the business or its value chain
- Market preferences, such as patterns in customer demand or talent attraction
- Competitor benchmarking to understand how other players are preparing (or not preparing) for climate change
5. Overlay these findings on company operations:
Identify where these external forces could affect business activities. These interaction points indicate the company’s climate risks and opportunities.
For example, identifying that a data centre is now in a floodplain, or that there is an upcoming regulation that will affect your clients.
6. Document these risks in a risk register:
Like other types of risk assessments, maintain a record in a risk register. Risks can be categorised by typology (e.g., physical or transition risk type), time horizon (short, medium, or long term), and whether it’s a risk to operations or the portfolio/supply chain.
- Risks should be reviewed regularly through standard enterprise risk management processes.
- Companies may consider going a step further with scenario analysis, meaning modelling the risks with different climate change scenarios (e.g., warming of 2°C vs. 4°C). While this analysis can help account for many possibilities from climate change, it may not be necessary for professional services firms and is used more commonly by asset-intense businesses, such as agriculture, utilities, or insurance.
Your climate risks and opportunities have been identified – now what?
Climate risk assessments form the basis of a sound ESG strategy. Companies can take the risks and opportunities identified and translate them into goals and initiatives that are relevant and helpful.
This process integrates into the cycle of ESG strategy – every year or so, risks and opportunities can be reassessed as goals are achieved. Risks and opportunities should be assessed regularly as the climate, market, and regulations continue to change.
A future with climate change seems daunting, and it will require businesses to adapt. But understanding the risks and opportunities today will help your organisation to be resilient tomorrow.
