Originally published in American City Business Journals
By René Groot Bruinderink
There was a time not long ago when climate change was something only coal-fired power plants or oil companies needed to think about. But it’s suddenly hitting the screen for companies that have no direct activity related to fossil fuels.
The pressure for corporations to address climate risk has reached an inflection point. Oil companies are ratcheting up action due to activist shareholders, executives have seen supply chains disrupted due to climate events, and even customers and employees have raised their voices. It’s a long-arc problem that a leader of any business will find hard to ignore.
I can’t say exactly when this shift started. Perhaps it was the report from the Financial Stability Board two years ago showing the world the financial implications of climate risk and how companies can build frameworks to address it. Maybe it was the Paris Agreement of 2015, or the ongoing annual publications of the Carbon Disclosure Project that force companies to be more transparent and think through what their future might look like.
Or perhaps it’s the most startling real-life example of a warming world to date: the fact that the United States’ most populous state, California, may soon have its lights go out this summer.
Whatever the cause of the urgency, here’s what I do know.
Five years ago, when I talked about sustainability within companies, it was usually with the managers of departments that were rich in ideas and poor in budget. They oversaw small, siloed teams and struggled to effect real change in their organizations.
Today, the people coming to me with worries about climate risk are executives with very real decision power.
If you are waiting for somebody to tell you to prepare for climate change, then you’re putting your business at risk. But hidden within that risk is an opportunity.
Here’s how climate risk mitigation is changing the corporate world, and how companies can start to take advantage.
Supply chain relationships are changing
The supply chain provides one of the clearest examples of how climate risk is changing the way businesses work together. Namely, it’s forced a shift towards long-term thinking.
Take the brewing industry, where climate change has a very real effect on crops that are critical to producing beer, such as barley and hops. Unstable grain markets mean the price of these crops are also unstable.
Enter craft breweries, which have carved out nearly a quarter of the $114 billion beer market. Craft beer typically relies on using more of these critical brewing ingredients than large-scale operations, meaning they’ve had to forge closer relationships with suppliers to create stable, predictable prices and ensure a lasting, climate-proof supply.
Consumer demand for craft beers drove the price of hops — which give beers their unique, flavors — up 14 percent from 2013 to 2015 alone, sparking a race among farmers to provide an infrastructure to support this rising demand. And as this demand grows, and more craft breweries are acquired by bigger conglomerates, the big brewing companies will soon have to adopt similar strategies. If they don’t, they put a critical component of their ecosystem at risk, not to mention their balance sheet.
Suppliers and buyers, from brewing to dairy farming to clothing to manufacturing, now have to think long term and beyond a simple buyer-seller relationship. They are forming partnerships — sometimes ones we never could have predicted would ever form — designed to last decades, not just two or three years.
Those that get their act together now will be prepared to withstand climate disruption for decades to come, and thus be better prepared for a prosperous future all around. They’ll also have more committed partners along the way.
Lower interest rates
Banks all over the world are starting to measure their GHG emissions related to their loans and investments, which will drive them to create new financial products. Loans are all about risk. So when a major multinational institution like Rabobank says they want farmers to invest in sustainable practices, the world takes notice.
Among other measures, Rabobank is offering lower interest rates on loans to farmers who invest in sustainable practices. While they acknowledge that the cost may be higher upfront, banks like Rabobank are beginning to see that climate risk is also a risk to their customers.
Those who invest now are mitigating their long-term risk in the bank’s eyes, creating stability, but also taking advantage of increasingly profitable emissions-reductions and other climate-related programs.
This has become a safe bet for banks, and it’s now paying off to pay attention to the right programs.
Not more complex, just different
Making the supply chain more resilient and cashing in on economic opportunities might feel overwhelming to traditional companies.
Engaging in a 10-year partnership with your supplier or taking an active role in energy production may sound like added complexity. You must engage with many more actors than you would have a decade ago.
But it’s always been complicated. What’s different are the potential upsides. Adding more actors to the equation strengthens your resiliency, increases efficiency and spreads out risk.
Companies that find this upside and nurture it will be the ones that come out on top as climate change fuels disruption across industries.
Take Marks & Spencer, one of the UK’s biggest retailers. They’ve committed publicly to several sustainability targets by the year 2025, including goals like reducing plastic use and investing in sustainable cotton farming practices.
On the surface, this is good press, but it’s also good business: They are setting themselves up for long-term stability and increased financial resilience by mitigating climate risk in a commodity business where customers won’t stand for large cost disparities.
These first steps are brave yet necessary for those who wish to not only endure climate disruption but thrive on the other side of it.
The moment has arrived. It is no longer triggered solely from fear, but now from a sense of opportunity. We are in the midst of the shift, in an urgent moment.
It’s time to take those first brave steps.
René Groot Bruinderink is a director in Navigant’s global energy practice, where he leads the Sustainability Solutions Transformation Offering .