Aligning climate risk with net zero carbon agendas

Companies must understand and build resilience to growing risks while cutting emissions

It’s been less than two years since ‘climate emergency’ was coined Oxford Dictionary’s word of the year. In recent months, global headlines have been dominated by terms such as ‘low carbon economy’, ‘the transition’ and ‘net zero’.

Now, the momentum around the ‘climate emergency’ is accelerating the net zero carbon drive – and the private sector is playing a very critical role in the transition. In fact, the increasing pressure from citizens and the private sector has pushed governments around the world to take active steps towards limiting greenhouse gas emissions and addressing climate change. So far, six countries have taken the ambitious step of setting net zero carbon targets in law.

In pursuing the welcome and accelerated transition to net zero carbon, it’s easy to focus solely on the carbon reduction measures. However, the impacts of climate change are already being felt in many parts of the world and the frequency and intensity of these impacts is only set to increase. Understanding climate change risks – and the need to manage, adapt and build resilience to them – is intrinsically linked with the net zero carbon agenda. These interlinkages present themselves in multiple forms, addressing a number of transitional climate change risks as well as ultimately reducing the physical impacts of climate change.

The joint challenges of net zero carbon and climate risk

When we think of climate risks, we often focus on the physical, such as extreme weather events and longer-term changes in weather patterns. The prevalence of these risks is becoming increasingly evident around the world. However, understanding climate risk does not end here. There are a series of transition climate risks that challenge the built environment, including policy, legal, market, reputation and technology risks.

Climate change will make high-risk investments, such as assets that are highly exposed to flooding or sea level rise, less desirable. Climate change induced alterations to the availability of resources such as water and energy will also amplify risks to certain assets. Building standards, carbon prices and climate risk disclosure can also lead to assets prematurely losing their value and becoming stranded assets. As part of this, businesses will face greater compliance and legal obligations, enhanced reporting obligations, changes in consumer preferences, regulations on existing products and services, increased costs of materials and may be affected by carbon pricing and taxes.

The recommendations of the Task Force on Climate Related Financial Disclosures (TCFD) that aim to improve and increase reporting of climate-related financial information were published in 2017 and are gaining momentum. They’re helping businesses to understand and disclose on physical and transition risks and the financial impacts of climate change. Furthermore, the UK has announced its intention to make TCFD-Aligned disclosures mandatory by 2025, with a significant portion of requirements mandatory by 2023. Many of these risks are often underestimated and have become increasingly apparent as the UK Government’s commitment to achieve net zero carbon by 2050 passed into law.

The joint benefits of responding to net zero carbon and climate risk

Taking early action and implementing a net zero carbon strategy means that your business will be more resilient to climate transition risks and will save costs over the long-term.

Each of the following benefits of adopting net zero carbon also have complementary benefits addressing the transitional or physical impacts of climate change:

  • Through pursuing energy efficient design and reducing operational energy use, you can mitigate the transitional risk of increased building standards and required performance, e.g. requirements for EPC B and EPC C 
  • Net zero carbon designs can reduce potential mandatory offsets, such as those required by the Greater London Authority in the London Plan
  • Current research has shown that early adopters of sustainable buildings through net zero carbon, BREEAM, improved EPCs and other standards are achieving rental premiums, higher leasing velocities and lower void periods as occupiers require the highest performing assets to meet their own ambitions. It’s also expected that assets that do not meet net zero carbon standards may require significant investment or become stranded in future
  • Early net zero adopters can secure renewable energy through Power Purchase Agreements (PPAs) at a fixed price reducing the risk of market fluctuations and increased energy prices 
  • As the market has matured, and net zero carbon has become more mainstream, ESG performance is becoming an intrinsic requirement for investors to provide capital with green bond issuance at an all-time high
A focus on enhanced brand value and reputation

There’s undoubtedly a huge amount of work to do. However, there are many opportunities to ensure a safe and profitable transition to net zero carbon. A key element of this is to focus on the enhancement of brand value and market reputation that comes with alignment to net zero carbon.

Millennials increasingly want to work for companies that have a purpose and that share their values as they take greater individual action to protect the environment. It follows that companies echoing these sentiments will be able to attract and retain employees aligned to their values and also appeal to an increasingly informed consumer base. For investors and landlords, their net zero commitment and enhanced reputation can help to attract and retain occupiers.

Through the UK Government’s 2019 net zero carbon commitment, the UK and the private sector have begun transitioning to a low carbon economy. By making this commitment to your key stakeholders, your business can develop resilience to climate change risk and reduce physical and transitional risk while ensuring opportunities are identified and leveraged on the pathway to net zero.

This article is part of our Net Zero: The Big Questions series which looks at some the complex questions around how buildings can achieve net zero carbon. Check out the rest of the series below:

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