Business motivations

1. Competitive pressures

The importance of perception should not be forgotten. For consumer-facing industries, climate change considerations are now an important part of the buying decision, as the emphasis of many recent advertising campaigns demonstrates. Businesses that respond to the challenges of climate change and are seen to act responsibly - are increasingly reporting increased sales from existing products and exploiting opportunities for new markets.

Many companies are reporting an increased emphasis on climate change response plans as part of the due diligence and competitive tender processes. This is both because of the importance of supply chain emissions in carbon footprint calculations and from using climate change response as an indicator of management quality.

Competitors With the changing dynamics of the marketplace, those companies that have actively reviewed their position with regard to climate change and perhaps have a specific response plan in place have a competitive advantage over those that have not. Many companies are not seeking to come top of any ranking but they do need to determine their own position before they can make their own comparison with competitors. At the current rate, those not taking action will be in the minority in many industries within 4 years and as benchmarking becomes more widely available, this will become a more critical issue.

2. External pressures

Investor pressure is rapidly becoming a major driver behind corporate climate change response, in particular for publicly owned companies. Sources of capital behind all businesses will need to be satisfied that the issue is being addressed and potential capital returns maximised.

Strengthening scientific evidence and political commitment to address the climate change threat will inevitably lead to an increase in regulation across all business sectors. This is likely to affect broad business operations in addition to controls over emissions and investments.

3. Improved performance

Financial motives
There are a number of financial aspects relating to climate change, not least that as a major business issue it will influence financial returns and volatility. In industries where climate impacts are felt to be particularly significant, higher capital returns will be required to reflect this increased risk.

For companies with long-term assets, it is particularly important that climate change is understood so that sound investment decisions are made. For businesses restricted by carbon allowances, the allowances are valuable balance sheet item. Some companies not directly involved with the allowance schemes also trade on the carbon markets as a source of profit.

Commercial opportunities
Climate change is a major influence on global supply and demand, with few markets and products unaffected. As a result, existing strategies should be reviewed and new markets and products assessed to determine the relative attraction and strategic fit for the business. In addition, there are opportunities for marketing, public relations and brand enhancement.

Operating efficiency
In light of the changes to the operating environment a sound climate response plan will lead to, for example, improved energy efficiency and appropriate procurement practices. Such efficiencies also lead to cost reductions and overall operational effectiveness. Energy-related decisions are ever more important, so this is of particular significance to companies in energy-intensive industries.

4. Prudent management

Risk management
The significance of climate risk to a corporate risk profile is highly variable: exposure to direct effects depends on the nature and location of the business assets and operations, while indirect impacts are more difficult to determine. However, for many companies the direct and indirect effects of climate change represent a significant risk:

Level of Risk = Chance of an Event x Possible Impact from the Event

The chance of climate change is now relatively high (and increasing) and
The possible impact from climate changeis already very high (and also increasing), so
The risk from climate change must also be very high.

It is important that the risk management process accommodates the full potential impacts, both for the ongoing success of the business and because insurers will increasingly demand it.

Employee concerns
People enjoy working in a positive environment and for a responsible employer. This responsibility now extends to climate change and in many markets, an active stance on climate change is required to attract and retain a good quality workforce. Internal sponsorship of climate change action plans has been the catalyst for action by many small companies.

Corporate responsibility
Some companies are motivated by genuine environmental concern, others merely seek to comply with corporate duties. Corporate governance requirements are becoming more onerous and director responsibilities over climate change will increase.

Since 2001 there have also been increasing disclosure requirements for environmental risks and liabilities, including climate-related risks. Historically, there has been little corporate disclosure of exposure to climate risk, with the majority of companies not even mentioning climate change in primary investor materials. The Carbon Disclosure Project, amongst other initiatives, has made major strides in addressing this.