Many companies overlook the pressing, often surprising, array of climate risks they face. By understanding them better, leaders can safeguard their business and identify opportunities to compete in a decarbonising world
By EB Content Studio
Climate change is the most significant challenge for the planet. While Africa has contributed negligibly to the changing climate, with just about two to three percent of global emissions, it stands out disproportionately as the most vulnerable region in the world. Every bit of additional warming adds greater risks for Africa in the form of greater droughts, more heat waves and more potential crop failures.
Evidence of the potential impacts that emissions-related temperature increases will have on resource availability, physical asset damage, and human health are driving the need for policy action and apposite investments. Hitherto, investments in the mitigation of climate change are growing; however, the speed and size of investment need to increase to evade tackle climate change and realise the targets of the Paris Agreement.
Below are four significant business risks associated with climate change and some thoughts on how investors can play a role in mitigating them through their portfolio investments.
Damage to buildings and operations
The direct operational impact of a weather-related disaster, such as a flood, can be broad-reaching in terms of physical damage, interruption in business continuity, or supply chain disruption. Generally, physical risk models start with global climate models of temperature, rainfall, wind, sea level rise, and other attributes.
These events can also disrupt business by halting manufacturing or making it impossible for employees to get to work.
As an opportunity, companies in Kenya and around the world are preparing for climate change and as a result, they are investing in resilient buildings that can better withstand damage from storms, strong winds and flooding.
Kenya, and Africa, for that matter, may offer investment opportunities in new infrastructural projects that are built to endure extreme weather events. Energy, water supply, sanitation and waste management, mobility services and communications are foundations for economic activity and also essential for achieving the Sustainable Development Goals. Other investments may involve refitting existing buildings and reinforce energy infrastructure for more resilience.
For investors, the opportunities are twofold: energy conservation within existing infrastructure in developed economies, and integration of resource efficiency in new commercial construction in emerging markets.
Opportunity Cost
Companies that stick with processes and products that are seen as environmentally “dirty” can miss out on new opportunities for growth.
A combined agenda for climate and growth offers numerous economic opportunities, including enhanced markets for low-emission infrastructure, technologies and services; increased market confidence spurred by greater climate policy clarity; and enhanced incentives for innovation and efficiency. There are vast opportunities for companies that create products that mitigate the climate crisis and those that help other companies divest from heavy carbon emitting industries.
As economies around Africa transition to lower carbon economies, investors could benefit from reducing their exposure to traditional energy sectors, investing in funds and companies that are positioning themselves for this transition, or focusing on specific themes such as renewable energy, biofuels, and green hydrogen, or innovative technologies such as electric mobility, carbon capture and storage.
Reputational Risk
Customers may spurn companies with brand reputation crisis.Hence, it is imperative to invest in companies with the best quantitative and qualitative disclosure and management practices.
One approach is to consider investing across various sectors of the economy, for example traditional energy, but only in companies that have industry leading environmental, social and governance (ESG) practices. This means investing in companies with sound corporate climate policies in place or those that disclose their carbon footprints as well as disclose reduction targets over-time.
In terms of the environment, a number of companies have made climate commitments to reduce their carbon foot, through a combination of efficiency measures in-house and supporting external emission reduction projects.. This may also include companies with better safety records and more diverse boards.
By investing in companies with top-notch environmental, social and governance metrics, investors may be able to axe the most horrible wrongdoers and position their portfolio in companies with high standards of sustainable corporate practices across various industries.
Risk to agriculture and water supply
There is increasing climate change threats for human health, food and water security and socio-economic development in Africa. Both flooding and drought can pose a risk to crops and livestock, as do extreme cold and extreme heat. Farmers in Kenya have lost billions of shillings farmers in the 20 years to 2019 as a result of the changing climate, largely from drought.
These impacts are the flow-on effects of climate change or extreme events, such as a supply chain being disrupted by extreme weather. According to a recent report, severe drought is projected to leave about 5.4 million people in Kenya without adequate access to food and water between March and June 2023. Although needs are growing, the drought response plans in Kenya still remain underfunded, which significantly restricts the ability of humanitarian organisations to act.
Investors may consider putting in their money in sustainable and resilient agriculture, water infrastructure or circumspectly appraise companies with operations in regions where food or water could be in short supply and pass up if the risks are too great.
In Kenya,drought and famine has greatly affect agricultural production, including maize, wheat, soy and cotton. Without adaptation, estimates show that agricultural profits for common crops could fall 30% by 2070, thanks to climate change.
Tagging investors along
Greater transparency will ultimately help address investors’ concerns, starting by helping them get smarter about the climate risks they may already hold in their portfolios (after all, it’s in no investor’s best interest to be inadvertently playing “pass the parcel” with hidden climate risks).
Companies can help bring investors along by supporting greater climate disclosure, and by reinforcing the goals—and value-creating benefits—of their climate agenda in communications with shareholders and the public.
Understanding climate risk is a catalyst for conversation, priority setting, and resource reallocation that the investor and the C-suite need to drive.
