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The increasing importance of climate change regulations and the associated risks

Writer's picture: Jose HopkinsJose Hopkins

Updated: Oct 30, 2024

flooding
Flooding at Wellington station in Shropshire after heavy rain in the early hours of Friday.

Flooding at Wellington station in Shropshire after heavy rain in the early hours of Friday. Photograph: Network Rail/PA. © Photograph: Network Rail/PA


In the last 5 years, we have witnessed a significant rise in the number of climate change strategic and reporting regulations and frameworks, these include Task Force on Climate-related Financial Disclosures (TCFD), UK Climate-related Financial Disclosures (CFD), International Financial Reporting Standards S1 (IFRS S1), International Financial Reporting Standards S2 (IFRS S2) and more. 


The objective of these frameworks is to assist companies disclose material climate-related risks and opportunities affecting their business model and value chain, allowing critical stakeholders to understand the impact from climate change to assist their strategic decisions.


Understanding the physical and transition risks associated with climate change is more important than ever. 


Key Physical Risks of Climate Change


Physical risks refer to the direct impacts of climate change on ecosystems and infrastructure, many of which are becoming more pronounced.

flood
United Kingdom Flood Alert

Examples include: 


1. Extreme Weather Events: There is an increasing shift in weather patterns which is leading to and increased risk of flooding due to increased levels of precipitation and an Increase in the severity of wildfires. These are disrupting supply chains, damaging assets, and affecting business continuity, which is leading to further costs through increased insurance premiums and credit risk. These events are no longer isolated but recurring, emphasising the need for better adaptation strategies.


2. Rising Sea Levels and Coastal Erosion: Coastal areas face heightened risks from rising sea levels and coastal erosion, threatening industries such as real estate, tourism, and agriculture. Businesses must adapt or relocate to minimise these risks. Coastal areas are also at greater risk of flooding as sea levels rise. 


3. Water Stress and Droughts: Water scarcity, driven by changing precipitation patterns, threatens industries that depend on consistent water access, such as agriculture and manufacturing. Droughts exacerbate operational challenges and raise costs.


4. Heat Stress and Rising Global Average Temperatures: Heatwaves are becoming more common, impacting energy consumption, workforce productivity, and agriculture. In regions with permafrost, thawing poses an additional risk to infrastructure. 


Additionally, warmer temperatures cause more water to evaporate and form additional moisture in the clouds. Therefore there is heavier rain which significantly contributes to more frequent and severe flooding. 


5. Landslides and Subsidence: Extreme weather events  are contributing to more frequent landslides and subsidence, destabilising infrastructure in vulnerable regions. These risks add further unpredictability to operations in affected areas.


Key Transition Risks in the Shift to a Low-Carbon Economy


Transition risks are related to the societal shift towards decarbonisation, driven by increase in  regulations.

climate change transition risks
Understanding of climate -related transition risks

Examples include:


1. Increased Pricing of Greenhouse Gas (GHG) Emissions: As governments implement carbon pricing mechanisms, businesses face rising costs linked to their emissions, particularly those in carbon-intensive industries.


2. Enhanced Climate Change Reporting and Regulation: Businesses now face stricter emissions-reporting obligations and regulatory mandates. Compliance is essential to avoid legal risks and reputational damage.


3. Changing Market Signals and Consumer Preferences: Shifts in consumer behaviour towards sustainable products are accelerating. Companies that fail to adapt risk losing market share, while those that do face challenges around cost and technological investment.


4. Financial Sector Regulation and Systemic Risks: Financial institutions are under growing pressure to manage climate risks responsibly. Inadequate and incomplete climate risk management could lead to systemic economic risks, especially in areas like lending and insurance underwriting.


5. Rising Costs and Investor Concerns: The transition to lower-emission technologies can be capital-intensive, leading to concerns among investors. Companies in industries with high environmental impacts must address these risks to maintain access to capital.


Conclusion

We at Simplify Climate are transforming and simplifying the integration of climate change. It is crucial for businesses to increase their understanding of physical and transitions risks derived from climate change as this is vital for long term strategic resilience.


Companies that fail to adapt may face financial losses, reputational damage, systemic risk exposure and an overall increase in their cost of capital. By proactively integrating these risks into their business strategies, organisations can better prepare for an increasingly uncertain future.

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