How to report on your efforts to mitigate climate risks
Every business owner knows there are risks involved in running a company. Identifying these risks and taking actions to deal with them is a key strategy used by successful business leaders.
Climate change is one of the biggest risks currently facing Canadian businesses, and it can quickly be forgotten in the busy day-to-day of many entrepreneurs, says Laura Zizzo, Co-Founder and CEO of Manifest Climate, a BDC-backed company.
“All businesses—not just those in energy-intensive sectors—should be thinking about climate risk as a financial imperative, something that is core to their business,” she says.
Zizzo offers the following advice for business owners looking to take action to mitigate climate risks and to start reporting on their progress.
It’s not only about sustainability anymore. It’s about viability. It’s a C-suite issue.
How to start thinking about climate risks?
In order to address climate risks, you’ll need to include them in your strategic planning.
This doesn’t have to be time-consuming or complicated. Think through what resources your company uses, what they cost, how those costs may change—and what it may cost to avoid the worst consequences of climate change.
There are two main categories of climate risks and costs to think about.
1. Transitional risks as the world moves to a fossil-free economy
Think about the parts of your operations that rely on fossil fuels—whether for transportation, heating or manufacturing.
- What are they costing you now?
- How are these costs projected to change as fossil fuels become less available?
- What alternative energy sources are available?
- How soon will you implement them?
- How will that affect your costs?
2. Physical risks from increasingly frequent extreme weather events
Think about strategies to protect and insulate your business from the consequences of such events.
- What weather patterns are expected where you operate?
- What safeguards can you put in place, and how might they change the way you do business? For example, what contingency plans do you have for weather-related disruptions to your supply chain?
- What are the costs involved in any changes you may need to make?
- What are the potential costs of not putting safeguards in place?
Your environmental efforts will also result in opportunities for your business.
- Resource efficiency—Energy efficiency as well as reduced material and water use can result in important savings for your business.
- Energy sources—Shifting toward lower-emission sources of energy could have a positive financial impact on your business; so too could participation in a carbon market or the use of new technologies.
- Products and services—Developing new products or services, diversifying your activities or shifting consumer preferences can increase revenues and improve your competitive position.
- Markets—Companies that develop a sustainable business model could open up new markets with governments or in green financial markets, for example.
- Resilience—Building a more resilient product could increase the value of your business and protect revenue in times of crisis.
The chart below is a quick way to understand how climate-related risks and opportunities can interact with your revenues, expenditures, assets and liabilities, and capital and financing.
Climate risks, opportunities and financial impact
Source: TCFD, 2017 report, pp. 8–9
Mitigate your climate risks
Once you’ve identified the main risks to your business, start monitoring them and take steps to mitigate them.
1. Measure your current carbon footprint
Your carbon footprint is the total amount of greenhouse gases your business releases into the atmosphere. These emissions are usually broken down into three categories, or scopes.
- Scope 1: Direct emissions from sources controlled or owned by your company (e.g. vehicles, furnaces, boilers, equipment)
- Scope 2: Indirect emissions from energy bought by your company (e.g. electricity, heat, cooling)
- Scope 3: All other indirect emissions (e.g. material use, waste, business travel, staff commuting with vehicles not owned or controlled by your company)
Businesses usually start by measuring and taking action to lower scope 1 and 2 emissions.
To do this, you’ll need to take stock of your company’s facilities, machines, equipment, vehicles and activities and determine how much greenhouse gases they are emitting.
You can read a more detailed explanation of how to measure your carbon footprint here.
2. Reduce your greenhouse gas emissions
Having identified the sources of your greenhouse gas emissions, you’ll be ready to develop a reduction plan. A majority of emissions happen in four areas:
Most businesses start with the largest sources of emissions. For example, you could replace your capital equipment to invest in more efficient machines or renovate your building to improve it’s insultation.
3. Report on your actions
Having taken action to mitigate your impact. You should make efforts to communicate your what you’ve done as well as results to employees, customers and the community. Not only will this show that you are taking action, but it can also help give ideas to others. Depending on the format your reporting takes, it can also help keep track of your efforts to ensure climate action remains a priority.
What format should environmental reporting take?
While there is no standard, one-size-fits-all template for environmental reporting, many public companies have started using a framework created by the Task Force on Climate-related Financial Disclosures (TCFD).
Public companies are legally required to disclose information that could affect their financials (including environmental factors). They can also report this information in corporate plans for internal use and in annual reports to shareholders.
Private companies are not required to release financial information, but there can be good reasons to do so—and even though the TCFD was created with large, public companies in mind, it can still inspire your own reporting.
According to Zizzo, smaller, private businesses and entrepreneurs usually take on environmental reporting for one of two reasons.
- You sell to or service a larger company that needs clarity on climate risks in its supply chain, whether to manage its targets or produce its own climate disclosures.
- You want to be proactive and start reporting on sustainability, for instance, before market pressures or regulatory requirements make it mandatory.
Your reporting objective will affect the format your environmental reporting will take. If you’re being asked to report on climate risk by a business you supply, the format to use will likely be dictated by that organization.
If you’re just trying to get ahead of the ball, there is no standard reporting format. But Manifest Climate recommends creating a one-page document that outlines how you are thinking about climate change. You can use that to identify and think through risks, to inform a business or strategic plan, to make decisions, and to present to investors, lenders, insurers or clients if asked.
What should be included in environmental reporting?
Whether you follow a prescribed format or create your own freeform one-pager, what to include will differ from sector to sector. For example:
- a technology firm might report on its plans to reduce hazardous waste
- a transportation firm might report on its transition to electric vehicles
- a chemical manufacturer might report on water use.
What all reporting has in common is the aim of being more aware of the natural resources a company uses—so as to use less of them if possible and to lighten their impact on the environment overall.
Why report on climate risks
1. Helps avoid unpleasant surprises
Zizzo says the same factors that make environmental reporting important for large public companies are also critical for smaller or private ones. No matter the size of the company, climate-related risks and sustainability issues can affect assets, liabilities, costs, and even its ability to do business and generate revenue.
“Whether you might face higher gas prices, supply restrictions, fleet turnover, resource scarcity, or uncertainty about your market—these are really important for companies of all sizes to consider so they’re not left surprised.”
The reason investors care about sustainability is not just because it’s good PR. They care because it’s important for long-term business success.
2. Making better business decisions
By scrutinizing how your company uses resources, you will have more data for strategic planning and be able to make better decisions about spending to improve your profitability and protect your business.
For example, a clear-eyed assessment of environmental risks and opportunities could help you strengthen your business through:
- process improvements that reduce waste—like going paperless
- investments that reduce energy costs—such as new windows, doors and insulation
- changes that future-proof your business—so it can better withstand natural disasters
3. Attracting and retaining investors and customers
Banks, insurers, lenders and investors care about sustainability because they know it’s important to a company’s viability.
“If you’re looking for venture capital, those investors are starting to ask about it, and there is a penalty for businesses that aren’t part of the climate solution,” says Zizzo. “Conversely, there is a lot of access to capital available if you can tell that story.”
It’s not just about costs. It’s about thinking about what you do as a business, how you’re part of the climate transformation, and how you should think about that for your longer-term business success.
Large companies are also increasingly looking to create sustainable supply chains. Thinking now about climate disclosure and planning for a greener future could position you particularly well to sell to those businesses.
The same goes if you want to sell your company to a private equity firm or a strategic buyer. These firms are increasingly including sustainability criteria in their investment decisions—not only to manage risk but also to create value. Building clean technology, low-waste processes, net-zero emissions plans and diversity and inclusion policies will make your company that much more attractive to these types of investors.