Climate Risk: The Long and Short of It

The Global Risk Report 2024, published during the World Economic Forum in January 2024, confirmed that climate risk remains high on the agenda of the world’s leaders. Interestingly, the Report characterizes climate as both short- and long-term risks as well as a “structural force that will shape the materialization and management of global risks over the next decade.” In other words, there could be climate-related “tipping points” that could affect our ability respond to global risks such as extreme weather events.

Against this backdrop, the findings from the December 2023 APCO Climate Confidence Tracker reveal that climate change is a major worry worldwide, with nearly half of the people identifying it as a top concern. But in many places, such as sub-Saharan Africa, Americas and Asia-Pacific, anti-corruption outweighs climate as something people expect governments to take action on. Climate change is seen as a secondary priority for governments, except in Europe and the Middle East and North Africa.

Despite the above, there’s cautious optimism about the possibility of reaching net-zero emissions by 2050 with 55% of respondents indicating they feel this is still achievable. This perhaps reflects the historic deal achieved by countries at COP28 to transition away from fossil fuels. What does this mean for business in 2024?

In the short term, climate risk for business stems predominantly from increasing regulation. The first arena in which this plays out is in disclosures. 2023 was the first year in which all global stock markets had at least a single ESG disclosure rule in place. In addition, the Corporate Sustainability Disclosure Regulation (CSRD) become active in the European Union on 1 January 2024. There’s also further disclosure regulation in the pipeline in the United States and beyond. All of these are putting climate risk prominently on the agenda of boards of private and public companies around the world.

Another arena in which climate risk is growing for business is around greenwashing. With growing case law in place, it is easier for business to be accused of greenwashing. A good example is the verdict of the Advertising Standards Association on a recent advertising campaign by Equinor (December 2023). The ASA found that “unqualified environmental claims could mislead if they omitted significant information” even if no product or service was being sold to a relatively professional audience. This means greenwashing can also occur in a business-to-business context, not just to consumers.

In the longer term, climate risk is driving a fundamental transformation of business models. This is not just about the decarbonisation of the global economy, it’s also about regulation such as carbon border taxes. In 2023, the European Union introduced the Carbon Border Adjustment Mechanism (CBAM). The CBAM will ensure the carbon price of imports is equivalent to the carbon price of domestic production in the European Union, avoiding “carbon leakage.” It is quite possible that other carbon taxes can arise in the long term too.

What are the implications for business? It may seem obvious, but it shows that climate risk is not just a concern for governments and citizens but also for business. Expect to see climate risk featured more on corporate risk registers in 2024. And from a corporate governance point of view, risk needs to be mitigated or tolerated. With hundreds of billions of dollars potentially at risk for business, taking climate and biodiversity action will increasingly become a priority for business.