Explained byBCG

Understand and address climate risks and opportunities

How to plan for climate risks and opportunities

Once you understand your company’s climate risks and opportunities, you should plan to mitigate negative impacts and capitalize on benefits. You can begin by prioritizing risk assessments for those assets and value chains most likely to be affected by climate change (see risks in 1.2). It is essential to ensure this risk monitoring occurs regularly (e.g., updating every 3-5 years and/or when new IPCC data is available). Additionally, it is important that your company account for climate opportunities.

Climate front-runners can create higher shareholder value compared to peer companies, both by mitigating risks and taking advantage of climate opportunities (see Figure 5). In fact, according to Refinitiv data, climate leaders generate higher total shareholder returns year-over-year on average when compared to laggards (1), p18.

Figure 5: List of climate advantages. Source: BCG analysis as of 2022.

Using a scenario-based approach to inform climate trajectory

Solidifying your company’s initial climate trajectory should be informed by weighing its prospects in terms of risks and opportunities under different scenarios.

To understand different climate outcomes, you can leverage the IPCC Shared Socio-Economic Pathways scenarios, which lay out different worldwide outcomes for varying amounts of warming, ranging from 1.4-4. 4°C of warming by 2100 (2). These scenarios can then be cross-referenced with tools such as the IPCC WGI interactive atlas to assess physical risks in regions of interest (e.g., company locations, major segments of your supply chain) (3). Using these tools, your organization can estimate the impact and cost of inaction to your company, which would rise steeply with each increment of warming.

This information should be considered in conjunction with the actions your company can take to address climate risks and leverage opportunities, as described in Sections 1.1 and 1.2. For example, these could include adapting to the changing environment to build long-term business resilience and creating new revenue streams through green product innovation. You should estimate the business impact of climate action by accounting for all material risks and opportunities and translating them to potential business impacts (e.g., lost revenues, repair costs, hiring savings, productivity losses/gains, improved financing terms, etc.) based on your best estimates.

This analysis can inform a climate transformation trajectory – a long-term directional guide based on different scenarios describing how your organization can adapt to climate change and capitalize on climate opportunities. This should be done by considering, among other things:

  • Current and potential climate impacts (e.g., IPCC-related analysis)

  • Climate-related opportunities and goals (e.g., green products, achieving Net Zero by 2050)

  • Risks to your business, including the cost of inaction

  • Your capacity to change your business model

  • The resources at your disposal

  • Practices for a net-zero world that can be developed and implemented in your organization

Establishing a well-informed climate transformation trajectory will help you answer why you should take action on climate and, accordingly, will lay the foundation for your climate journey.