Impacts: Financial and Regulatory - Partners in Project Green

Top takeaways:

The long-term physical changes in the Earth’s climate present significant risks of financial loss through damage and disruption to human health, infrastructure, agriculture, and supply chains.
Organizations who want to demonstrate their commitments to environmentally conscious, climate-friendly operations and avoid “greenwashing” should be confident that their claims are honest, clear, and backed up by sufficient data.
Government regulations at all levels are increasingly updating or creating new regulations to align with climate change goals; this could present organizations with additional costs of compliance or place severe penalties on non-compliance that must be considered in operational and budget planning.

As the Earth’s climate changes, the increasing occurrence and severity of extreme weather events and abnormal climatic conditions puts stress on local and global economies resulting in disruptions and financial losses.

The Swiss Re Institute report on The Economics of Climate Change: No Action Not An Option (2021) assessed the impact of climate change on the global economy based on the current rate of temperature increases in relation to the Paris Agreement targets^[1]. Based on the projections, the report estimated a 9.5% reduction in GDP in North America by mid-century under a severe-case scenario of a 3.2°C temperature increase. Best-case scenario estimates were on the order of a 3.1% reduction in North America’s GDP by mid-century. This is possible if we can meet the Paris Agreement targets of limiting global warming to well below 2°C.

Other areas of the globe are expected to experience more significant losses, particularly Asia, the Middle East, Africa, and South America. These impacts would have significant implications for global supply chains as decreases in regional productivity and economic output can cause disruptions around the world. In the Global Risks Report 2022, the World Economic Forum identified inaction or failure to act on climate change risks as the most impactful and second-most likely long-term risk to the global economy^[2]. To quote a statement in the report,

“If businesses do not take action to address their climate change risks, they may face further impacts by missing out on the global transition towards a low carbon economy that is already underway.”
World Economic Forum, 2022

Financial Risks

For many organizations, the long-term physical changes in the Earth’s climate present significant risks of financial loss through damage and disruption to human health, infrastructure, agriculture, and supply chains. To learn more, check out:

An additional climate change-related risk to businesses that is often overlooked is the reputational risk of perceived climate change inaction or emission-intensive business practices. As people become more aware of the impacts of their consumption practices, they continue to look for environmentally responsible companies and products. PwC Canada’s 2019 Consumer insights survey showed that up to 42% of Canadians are avoiding plastic where possible and buying products with less packaging. When it comes to their willingness to spend, 46% of Canadians are willing to pay a premium for organic food items, 33% for ethical and environmental considerations and 34% for brands known for their sustainability practices^[3].

Similar trends are also being seen in employment; a 2021 Gallup poll found that 70% of workers in the U.S. cite organizational environmental impact as an important consideration for where they choose to work^[4]. Such changes in consumer and employee preferences have big implications for businesses as this can lead to losses in competitiveness and talent if not addressed properly.

Avoid the risk of “Greenwashing”

To demonstrate their commitments to environmentally conscious, climate-friendly operations, businesses around the world are increasingly setting their own GHG emissions reduction targets or adopting different reporting frameworks. However, businesses that are vague on details or are found to provide misleading information can be accused of “greenwashing”. Perceptions of greenwashing can lead to significant financial risks in the form of customer boycotts or litigation. A recent example is provided in the case of the Royal Dutch Airlines (KLM) and the lawsuit brought forth by environmental concerns over their “Fly Responsibly” advertisements^[5]. Environmental campaigners are suing the airline on the grounds that the adverts provide misleading information on the sustainability of flights^[6]. Though this case is still in court (at the time of this article’s release), it represents the increasing concern of consumers and environmental groups at potentially false or deceptive information on corporate climate commitments and actions. Such cases can result in negative brand perceptions, decreasing customer bases, and significant legal fees.

Organizations can avoid perceptions of greenwashing and reputational risks through transparency and honesty on their environmental efforts. Best practices to avoid greenwashing include:

clear claims that are easy to understand
providing data or evidence to back up the claim
avoiding misleading comparisons, statistics, language or images
being honest about the organization’s actual achievements^[7]

Further credibility can be achieved through corporate social responsibility (CSR) or environmental, social, and governance (ESG) reporting frameworks. Through mandatory and voluntary disclosure and reporting frameworks, an organization can identify the actions it is taking on climate change and disclose it to an independent third-party organization for verification. An example includes the Task Force on Climate-Related Financial Disclosures (TCFD). The TCFD is a global task force consisting of 31 members across the G20 that represents preparers and users of financial disclosures and is committed to market transparency. The organization provides a framework and recommendations to help organizations better collect and share climate change risk information with investors, lenders, and insurance underwriters so that they can understand an organization’s climate change risks and how they are addressing them.

Regulatory Risk

Though many organizations are taking voluntary steps to address physical and reputational climate change-related risks, another form of financial risk for organizations to consider is regulatory risk. In efforts to further drive action and meet national climate change targets, governments are increasingly updating or creating new regulations to align with climate change goals. Such regulations may present organizations with additional cost of compliance or place severe penalties on non-compliance.

The Canadian government has taken a two-tiered approach to its climate strategy, relying on both federal and provincial initiatives. At the federal level, Canada’s Greenhouse Gas Pollution Pricing Act, 2018 was brought into force as part of the Pan-Canadian Framework on Clean Growth and Climate Change. The Greenhouse Gas Pollution Pricing Act puts a charge on GHG emissions ($50/tonne in 2022 and set to increase by escalation of $15/tonne per year to $170/tonne in 2030) and has an output-based pricing system for facilities with emissions exceeding 50,000 tonnes CO2e (Carbon dioxide equivalent) per year^[8]. CO₂e is a measure used to compare the emissions from various greenhouse gases based upon their global warming potential to that of carbon dioxide, measured in metric tonnes. The federal pricing system serves as a backstop for provinces that do not have carbon pricing systems which meet minimum federal standards.

Another regulatory example includes the Clean Fuel Regulations which came into effect in June 2022 under the Canadian Environmental Protection Act, 1999, and brought a Canadian Clean Fuel Standard into law, with the goal of driving innovation in low-carbon fuels and specifying carbon intensity limits for fuels^[8]^[9]. Such regulatory changes will force organizations to take action to reduce the GHG emissions of their products or operations or risk facing severe financial penalties for non-compliance.

In 2022, Ontario introduced its emissions performance standard program to regulate GHG emissions from the province’s large industrial facilities and align with the standards of the federal output-based pricing system^[8].

What does this mean for businesses?

In addition to the financial risks associated with physical impacts of climate change on human health, infrastructure, food, and supply chains, organizations must also understand the financial risks that result from consumer and worker preferences and regulatory and policy changes. Fast-changing consumer preferences and regulatory landscapes will reward more proactive organizations that take credible action on climate change faster. Businesses that fail to address these financial risks may find it increasingly challenging to compete in national and international markets. Organizations must continue to assess the risks of changing perceptions of climate change and its impacts, as these perceptions can lead to financial impacts through regulations, policies, and consumer behaviour.

Bottom Line

The choice of inaction or failure to act on climate change risks is the most impactful and second-most likely long-term risk to the global economy. As customers become more aware of the impacts of their consumption practices, they continue to look for environmentally responsible companies and products.

To demonstrate their commitments to environmentally conscious operations, businesses around the world are putting more time into the Corporate Social Responsibility and Environmental Social Governance strategies. Businesses should ensure their efforts and claims are legitimate to avoid the negative impacts to reputation and profits if the claims are found to be “greenwashing”. Government regulations will continue to evolve as they price carbon emissions, change fuel standards, and increase corporate fines for non-compliance and violations. How businesses can adapt to fast-changing consumer preferences and government regulations will be key to their long-term continuity and profitability.

Partners in Project Green’s Building a Climate Resilient Business Resource Kit provides a foundation in the basics of current climate science, the impacts of climate change on businesses, and mitigation and adaptation strategies. Please explore these resources and connect with us to advance your organization’s climate resiliency.

For more information on climate change mitigation and adaptation from a business perspective:

Mitigation

Adaptation

[1] A likely temperature increase of 2°C to 2.6°C, and a severe increase of 3.2°C by mid-century.

[2] World Economic Forum. Global Risks Report 2022. Accessed May 24, 2023. Click here for URL.

[3] PwC Canada, Environmental sustainability becoming a business imperative, 2019. Accessed May 24, 2023. Click here for URL.

[4] McCarthy, J. 2021. Environmental Record a Factor for Most U.S. Job Seekers. Accessed August 22, 2022. Click here for URL.

[5] Thomas, M. 2022. Environmentalists Sue Dutch Airline KLM for “Greenwashing”. BBC News. Accessed August 15, 2022. Click here for URL.

[6] Gayle, D. 2022. Climate Group Sues Dutch Airline KLM Over “Greenwashing” Adverts. Accessed August 15, 2022. Click here for URL.

[7] Edwards, C. 2022. What is Greenwashing? Business News Daily. Accessed August 17, 2022. Click here for URL.

[8] Duncanson, S., Olexiuk, P., Baines, S.C., Sadikman, J.A., Baker, J., Rodriguez, L., and Light, A. 2022. Canada’s New Clean Fuel Standard – Obligations for Liquid Fuel Suppliers and Opportunities for Low-Carbon Energy Producers. Osler. Accessed August 8, 2022. Click here for URL.

[9] Government of Canada. What are the Clean Fuel Regulations? Accessed August 22, 2022. Click here for URL.