7 minute read 24 Sep 2021

As the climate change impact becomes more visible, investors, business owners and philanthropists must address key sustainability risks.

Aerial view of river through mangroves

How to turn climate change risks into opportunities

Authors
Simon Yeo

EY Asean Climate Change and Sustainability Services Leader; Partner, Assurance, Ernst & Young LLP

Assurance and transaction advisory professional. Provides sustainability advisory services to public and private sectors.

Brian Thung

EY Asean Financial Services Leader

Outgoing and diligent operator. Inclusive leader who welcomes diverse thoughts and views.

7 minute read 24 Sep 2021
Related topics Climate change and sustainability Climate-related reporting Sustainability in Financial Services Sustainable Impact Hub Banking and capital markets
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As the climate change impact becomes more visible, investors, business owners and philanthropists must address key sustainability risks.

In brief
  • Climate change brings about physical and transitional risks that will impact investors, business owners and philanthropists.
  • Decarbonization strategies are critical as stakeholders’ climate response expectations continue to increase.
  • Investors, business owners and philanthropists must work together to achieve sustainability goals and seize opportunities from the green economy’s growth.

As the world stares down the barrel of the climate crisis, the challenge to reach net zero is substantial. Taking meaningful action to drive a more sustainable path forward should be the imperative of our generation, requiring three cohorts in particular — investors, business owners and philanthropists — to make substantial contributions to this essential initiative.

Investors can reallocate capital to sustainable assets

Capital should be reallocated to sustainable assets as investors move to protect their portfolios from climate risk, leverage decarbonization opportunities and put their wealth toward protecting the planet.

We can already see this trend at work. From January to November 2020, investors in mutual funds and ETFs globally invested US$288b in sustainable products, a 96% increase compared with the whole of 2019.1 This significant rise stems partly from investors’ growing awareness of the need to protect their portfolios from physical and transitional risks.

Physical risk

The increasing severity and frequency of extreme climate change-related weather events can erode the value of financial assets, increase liabilities or introduce new industry-wide risks. For example, more frequent natural disasters, increased droughts and floods as well as water shortages are threatening the insurance, agriculture and soft drink sectors respectively.

Transitional risk

Many businesses are at risk of potential losses arising from a low-carbon transition, including regulatory shifts supporting climate change mitigation and adaptation efforts, renewable energy and decarbonization solutions as well as changes in investor and consumer sentiments and preferences. Companies that do not adapt quickly may be at risk of financing difficulties, increased capital costs, business model failures, reputational damage and fines.

Investors are also increasingly conscious of global environmental problems and interested to be part of the solution through the way they invest. Private banks are seeing rising interest and openness toward sustainable investing, especially among Generation Z and millennial clients. A 2019 survey found an estimated 95% of millennials were interested in sustainable investing.2 As a result, we are also seeing an uptick of investor interest in ESG reporting and initiatives like the Task Force on Climate-related Financial Disclosures (TCFD). This uptick is evident from the 2020 EY Climate Change and Sustainability Services fifth global institutional investor survey, where 91% of respondents indicated that nonfinancial performance played a pivotal role in investment decision-making frequently or occasionally over the past 12 months.

Nonfinancial performance and investment decision-making

91%

of institutional investors said nonfinancial performance played a pivotal role in investment decision-making frequently or occasionally over the past 12 months.

One area of concern is that the June 2021 EY Global Climate Risk Disclosure Barometer, which draws on reported TCFD data, found that only 41% of organizations in the sample are conducting scenario analysis. As climate-related risks are inherently more complex and long-term than most traditional business risks, scenario analysis is essential for organizations to understand the physical, economic and regulatory connections between the future climate impact and their business and supply chain activities.

How EY can help

Climate change and energy

Our pragmatic business approach helps clients to respond to the physical risks of climate change, as well as to operate in new markets and regulatory environments related to carbon and renewable energy.

Read more

Business owners can adopt decarbonization strategies 

Business owners should think about the impact of climate change on their business models, risk management and governance as well as establish new strategies and protocols to deal with this threat.

The number of businesses with decarbonization strategies is increasing, given rising climate response expectations from investors, customers and regulators. Consumer concern on climate change will likely continue to persist, underpinned partly by Generation Z’s unease as the impact of climate change unfolds.

Global and local regulators are focusing more on organizations managing financial risks from climate change as well as making more and better disclosures regarding climate risk exposures. The Monetary Authority of Singapore has issued guidelines on environmental risk management for banks, insurers and asset managers, which encourage the adoption of frameworks like the TCFD recommendations.

In response, companies are committing to various climate actions, including implementation of the TCFD recommendations, setting a science-based target, using 100% renewable energy as part of RE100, reducing short-lived climate pollutants and even setting a carbon price.

Those yet to strategically consider decarbonization risk losing their competitive edge and being left behind. To develop a science-based emission reduction target, companies should first understand their full carbon footprint, which includes the following:

  • Scope 1: direct emissions from owned or controlled sources
  • Scope 2: indirect emissions from the generation of purchased electricity
  • Scope 3: all other indirect emissions in a company’s value chain

For most organizations, the scope 3 emissions from outside their operations are likely to be much higher than those within. Businesses will therefore need to address decarbonization risk across their supply chains.

To identify hot spots and reduce scope 3 emissions, business owners should take the following actions:

  • Engage with key suppliers to reduce their emissions in line with climate science, potentially offering status or financial incentives
  • Switch to suppliers with lower carbon footprints or shift to low-carbon products
  • Redesign products and services using circular economy principles to lower the intensity of life cycle emissions

How EY can help

Sustainability and supply chain advisory

Our teams can help you understand risks to supply chains such as human rights issues, resource constraints, climate change and government payments.

Read more

Philanthropists can plug the funding gaps 

In a time of volatility and uncertainty, philanthropy is sometimes better positioned than governments and businesses to respond rapidly, especially in less developed countries — enabling it to plug funding gaps that the public and private sectors cannot fill.

Besides donating to climate disaster responses, philanthropists should take advantage of their comparative ability to shoulder long-term risks. Given how philanthropic capital can take on technology risks more easily, philanthropists can play a more active role in advancing innovative programs for climate change mitigation and prevention.

A first step might be to act on existing research and prioritize capacity building of populations and communities likely to be affected by climate change. In this regard, philanthropists can support sustainable and equitable development, frontline advocacy, emerging breakthrough technologies and unique collaborations that bring the public, private and civil society sectors together to help solve the climate crisis.

Between 2015 and 2019, the smallest annual global grantmaking amounts for climate change mitigation went to carbon dioxide removal and the industrial and building sectors.3 There was also an insufficient focus on climate mitigation in “greening” transportation and agricultural systems and in sustainable finance that unlocked green growth.4

Additionally, philanthropists could usefully fund more research to reduce information asymmetry on current and future climate risks, which is one of the biggest barriers to adaptation decision-making.5 This will help the scientific community and governments better understand multidisciplinary impacts of climate change, identify critical knowledge gaps and assess potential climate adaptation policy responses. 

Investors, business owners and philanthropists not only play a key role in supporting global efforts to achieve net zero, but also in driving growth of the green economy.

Everyone must play their part

We are facing a climate emergency and our progress toward a decarbonized economy over the next 10 years will be crucial. As the realities of climate change become increasingly visible, the world needs all investors, business owners and philanthropists to play their part in providing a capital flow that leads to net zero.

Becoming part of the solution is not just the right thing to do: it’s a smart economic move. In the last few years, the green economy’s growth has accelerated, with new industries now poised to transform global markets. These are the areas that investors, business owners and philanthropists should be focusing on as we address one of the greatest existential threats of our time. 

How can climate risk provide opportunities to create value?

Climate change presents opportunities and risks and is expected to have a profound impact on life as we know it. This joint publication between EY and Bank of Singapore aims to raise awareness on this topic and provides insights for three key stakeholder groups — investors, business owners and philanthropists — to inspire and guide them on their climate action journey.

 

Request a copy

Summary

Investors, business owners and philanthropists should ask themselves how the climate crisis will affect their strategies and play a more significant role to help the world achieve net zero. 

They also need to leverage their capabilities to address key risks and support growth of the green economy, which has accelerated over the past few years.

About this article

Authors
Simon Yeo

EY Asean Climate Change and Sustainability Services Leader; Partner, Assurance, Ernst & Young LLP

Assurance and transaction advisory professional. Provides sustainability advisory services to public and private sectors.

Brian Thung

EY Asean Financial Services Leader

Outgoing and diligent operator. Inclusive leader who welcomes diverse thoughts and views.

Upvote