Going net zero: how it can impact your business's exposure to climate change risk

Increasing pressure to act accelerates the net zero drive

March 12, 2020

With increasing pressure from citizens and the private sector, governments around the world have started to take active steps towards limiting greenhouse gas emissions and addressing climate change.

In 2019, ‘climate emergency’ was coined Oxford Dictionary’s word of the year[1] and the global headlines were dominated by terms such as ‘low carbon economy’, ‘the transition’ and ‘net zero’. The ‘climate emergency’ has accelerated the net zero drive with private sector playing a very critical role in the transition.

Last year, 23 of the UK’s leading commercial property owners committed to net zero carbon by 2050 as well as to report and disclose on climate change risks [2]. Net zero and climate change risk are intrinsically linked with the pathway to net zero addressing a number of transitional climate change risks as well as ultimately reducing the physical impacts of climate change by reducing business impacts to zero.

The transition risks of climate change are very often underestimated

The transition risks are the policy, legal, market, reputation and technology risks resulting from the transition to a low carbon economy. The risks of climate change are very often underestimated and will become increasingly apparent as the UK Government’s commitment to become net zero by 2050 is enshrined into law.

Businesses will face 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[3].

The recommendations of the Task Force on Climate Related Financial Disclosures (TCFD) published in 2017 are gaining momentum and are helping businesses to understand and disclose on physical and transition risks and the financial impacts of climate change. 

The pathway to net zero success

The pathway to net zero includes: ensuring energy efficient design, operation, construction and refurbishment. Operational energy needs to be reduced, energy procured from renewable sources and the remainder offset.

Early action and net zero commitment means that your business will be more resilient to these transition risks.

  • Through pursuing energy efficient design and reducing operational energy use, one can mitigate the transition risk of increased building standards and required performance – (e.g. requirements for EPC B and EPC C). 
  • During construction and refurbishment, early net zero adopters may potentially secure products while there is still a surplus available (e.g. prior to price increases due to increased demand).
  • Early net zero adopters can secure renewable energy at a fixed price prior to any market fluctuations. Early responders may be able to secure this at a strong premium from recognised providers. 
Enhance brand value and reputation

Another recognised advantage of a net zero commitment is the enhancement of brand value and market reputation as a sustainability leader, with laggards feeling the reputational impacts of failing to act.

Millennials increasingly want to work for companies that have a purpose and that share their values.  -   companies echoing these sentiments support the attraction and retention of employees aligned to their values.

These values also appeal to an increasingly informed consumer base. This commitment and enhanced reputation can support the attraction and retention of tenants – tenants with similar commitments will increasingly require net zero spaces creating an increased demand in the market.

Tenants may feel the impacts of the transition as undiversified businesses reliant on carbon intensive energy sources may suffer as new legislation and changing consumer preferences affect business performance. As the market matures, and net zero becomes mainstream, we may also see ESG performance become an intrinsic requirement for investors to provide capital.

Through the UK Government’s 2019 net zero commitment, the UK and the private sector have begun the journey transitioning to a low carbon economy. This transition will no doubt, include many lessons learnt and transition risks encountered along the way. Through making this commitment to your key stakeholders, your business can develop resilience to climate change risk, reduce physical and transitional risk impacts on your business, whilst ensuring opportunities are identified and leveraged on the pathway to net zero.

Contributed by Christi Vosloo, Senior Consultant, Sustainability