3. Go green or go bust | Top Five Risks | RiskMap 2021
Top Five Risks
Go green or go bustClimate change is fast moving up risk registers as an existential threat to organisations’ reputation, staff and future growth
An inflection point is coming for the relationship between businesses and climate change in 2021. The year just passed saw the issue pushed onto the geopolitical back burner, even while the impacts of climate change were highlighted by enormous wildfires across the globe. But the geopolitics is changing – governments that have kicked the climate can down the road will start to feel the heat. In the wake of COVID-19, business are more alive than ever to the risks of inaction today on issues that will shape the business landscape for decades. And though the pandemic has forced the activist society indoors and online, it has not gone away and has forced it to evolve.
All this is set alongside the reality on the ground. The acute and chronic effects of climate change are getting worse by the year. They’re already leading to record losses. With record-breaking climate events now the norm, fires, floods and storms will pose greater operational risks to businesses than ever in 2021.
Making up for lost time
In 2020, greenhouse gas emissions temporarily plummeted as local and national authorities imposed stringent restrictions on all aspects of daily life. Cancelled global summits removed the incentives for some governments to demonstrate greater climate ambition. Meanwhile, the pandemic distracted from the immediate need for business to reform as public health and the economy became society’s main concerns.
But the damage wrought by COVID-19 creates a historic opportunity for governments to “build back better”. While subsidies have made a low-carbon future possible, stimulus will accelerate its onset in 2021. Many are starting to pour billions of dollars into recovery plans that will prioritise the transition to a green economy.
To avoid the worst impacts of climate change, the planet needs to reach net zero emissions by approximately 2050, but we must reach peak emissions considerably sooner than that. Despite an ongoing public health crisis, national commitments to carbon neutrality will gain momentum in the year ahead. Several dozen nations – and the EU – have made net zero pledges so far, and many more are reportedly considering similar moves. Minor emitters with the most to lose from climate change were among the first to make such announcements. Major emitters with the largest economies to transition to a low carbon future are now getting on board.
Extreme weather events in 2020
- Jan-Feb | Australia – Australia recorded its largest and most destructive bushfire season on record in 2019-20. Colloquially referred to as the “Black Summer” and burnt over 12.6m hectares across the country.
- March-May | East Africa - The region experienced disastrous flooding between March and May. A changing climate is also likely to have contributed to one of the region’s worst locust invasions in decades.
- June | Russia – Temperatures on 20 June rose to 38 degrees Celsius in the Russian town of Verkhoyansk, the highest recorded north of the Arctic Circle.
- August | US – The Western United States experienced an unprecedented wildfire season with major fires in Oregon, Washington and Colorado. In August, California recorded its first “gigafire” after the blaze expanded beyond 1m acres. Among the impacts, fires caused a major deterioration in air quality.
- Oct-Nov | Southeast Asia – severe flooding occurred across Asia, particularly in Southeast Asia where eight cyclones and depressions made landfall between October and November.
- November | North Atlantic (North America/Caribbean) – The North Atlantic Hurricane Season saw 30 tropical storms from July to November, breaking the previous record of 28 (2005) and well above the average of 12. It ended with back-to-back category 4 hurricanes in Central America.
Climate activism and litigation
- August | Denmark – Greenpeace activists on 18 August 2020 occupied a North Sea platform in a protest against offshore oil and gas activity in Danish waters.
- September | UK – Extinction Rebellion activists on 5 September 2020 erected structures to block access to printworks in the UK, disrupting the print run of several newspapers.
- March | New Zealand – two activists representing Extinction Rebellion on 3 March 2020 boarded an oil platform that was travelling off New Zealand’s South Island. They stayed in position for approximately 14 hours.
- September | Germany – Since September 2020, protests against a highway construction project in the Dannenrod Forest (Germany) have escalated with activists clashing regularly with the police.
- July | Ireland – The Irish Supreme Court in July 2020 ruled in favour of an environmental NGO that the government’s climate mitigation plan did not comply with the law.
- November | France – France’s highest administrative court on 19 November gave the government three months to prove that its policies ensure the country meets its climate commitments.
- September | France – Plaintiffs in September 2020 filed the first climate change lawsuit with the European Court of Human Rights (ECHR), accusing 33 states of violating their right to life by not taking sufficient action to tackle climate change.
All members of the G7 are likely to be committed to carbon neutrality by early 2021 - on their own or as part of the EU – and the EU is seeking to enshrine its landmark Green Deal commitments in a European Climate Law. But the centre of the debate is shifting from the West and gaining traction in the East. China, Japan and South Korea – East Asia’s three largest economies – all now have net zero plans. Although short on detail, they represent major shifts for a region that remains heavily reliant on coal.
The biggest geopolitical impetus will come from a change in US administration. A quirk of timing saw the country tumble out of the Paris Climate Agreement the day after voters chose their next president. The incoming administration of Joe Biden has pledged to rejoin Paris “on day one” and more broadly attempt to reinstate US climate leadership. Democratic party control of Congress will boost prospects of ambitious and costly environmental initiatives at home and Biden will push for more concerted action overseas. Expect greater integration between trade policy and climate action, among other tools in the foreign policy toolkit.
What to expect in 2021Strategic
- New or updated Nationally Determined Contributions (NDCs) from governments around the world ahead of the UN’s 26th annual climate summit (COP26) in November 2021
- Moves towards creating a global carbon market at COP26
- Opportunities generated by additional government financing and incentives schemes supporting a green transition post-COVID-19
- Increasing barriers to access or higher costs to finance for carbon-heavy companies
- Introduction of mandatory environmental due diligence legislation in the EU
- Rise in number of cases of climate change-related litigation targeting governments and businesses
- More frequent record-breaking extreme weather events challenging business operations and crisis management
- Growing mitigation costs for businesses as rising temperatures increasingly impact workers’ health, safety and productivity
- Return of (smaller, but more targeted) protests and direct action as environmental groups pressure governments and corporations to commit to green recoveries
- Rising cyber activism targeting companies in carbon-intensive industries and governments through distributed denial of service (DDoS), data leaks and website defacement
- Specific requirements for corporate reporting in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD)
First mover governments will link international investment and trade policy to action on climate change. Laggards will need to consider a future where their intransigence erodes competitiveness and shrinks export markets. If not, twilight will likely approach faster for their sunset industries. For example, although the Australian government has resisted calls to set its own net zero targets, the prospect of its key markets in East Asia pivoting towards green energy may cause a change of heart.
Expect most countries to produce new climate pledges as mandated by the Paris Agreement. Attention will be on China when it unveils its next five-year plan in early 2021. This will likely include new details of its environmental ambitions, and will set the tone and level of ambition for others. Businesses will see significant regulatory change well beyond the next 12 months. But 2021 will reveal who has a clear roadmap for a smooth transition, and who is settling in for a bumpy ride.
Business taking the lead
Not all governments are focusing on a green future, but the nature of the recovery will not be theirs alone to decide. While COVID-19 has kept activists away from corporate premises, it has propelled their concerns into virtual boardrooms. It has also adjusted the commercial calculus by accelerating “peak oil” and raising new questions about stranded assets that become unprofitable with the energy transition. Rather than backsliding on environmental commitments during the pandemic, businesses are doubling down.
Multinational corporations are pushing forward with their own net zero targets. As well as pledging to achieve carbon neutrality through cutting their own emissions and those produced in purchased electricity, they are increasingly seeking to bring down all indirect emissions up and down their value chains.
Investors and asset managers will continue to drive the agenda by scrutinising their portfolios, pressuring governments to play regulatory catch-up. Financial markets are clamouring for companies to disclose more information about their exposure to the effects of climate change and, increasingly, how they plan to manage the transition to a low-carbon economy. A majority of the world’s largest companies already support climate-related financial disclosures. It is only a matter of time before reporting becomes mandatory. New Zealand in September 2020 became the first country to announce plans to force companies to report on climate risk. The UK followed in November, but its measures will be in place sooner. Investors are demanding these changes now.
Alongside the growing prospects for mandatory environmental due diligence, these developments will push corporations to examine their full value chain, increasing pressure and scrutiny on partners, suppliers and even consumers in low-regulation jurisdictions. If green regulations don’t yet constrain corporate action, access to finance or other partnerships might.
Although it will continue to compete with COVID-19 for the public’s attention, climate change will return as a major motivator for activism over the coming year. While the pandemic continues, activists from an ever larger cross section of society will draw links between climate change, the degradation of the environment and disease more broadly. The inevitability of more record-breaking extreme weather events will reinforce this view. Once out of self-isolation, activists will hold the feet of big business to the fire. Don’t expect incremental change to placate. To cries of “no going back”, campaigners will continue to insist on systemic reform.
In a world still battling with COVID-19, protests are unlikely to return on the same scale as before the pandemic. But that does not mean businesses should give them less attention. Activism is becoming an ever more complex phenomenon. Expect more targeted actions and civil disobedience against polluting industries. Those that have benefited from bailouts will face even greater scrutiny if they have not used the cash to burnish their green credentials.
Many activists will hold on to some of the lessons learned while forced online during lockdown. They will continue using cyber tools for online coordination and messaging, but some will also increasingly explore offensive cyber activity.
Reputational risks will rise as consumers, shareholders, employees and the public lean hard on companies that do not have a handle on their climate risk. Legal risks will too. Climate change litigation is growing. Activists and concerned citizens will use it to hold governments to their climate pledges or force them to show greater ambitions. Improvements in climate attribution science will bring corporations into the frame for legal action.
Climate change is no longer a distant imperative sometimes viewed as a source of burdensome environmental regulations and additional cost. Instead, it is fast moving up risk registers as an existential threat to organisations’ reputation, staff and future growth. No organisation, whether public or private, can afford not to take a stance.