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Impact of climate change on businesses

Whether TCFD compliance is compulsory in your country and industry or not, the interconnected nature of economies, sectors, and global markets means that your MEA business will likely be impacted at some point in the near future.
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Impact of climate change on businesses

The implications of climate change — rising sea levels, extreme weather events, and loss of habitats, among others — make it an existential risk to society.

While the transformation of the energy sector and energy consumption is a primary focus for combating climate change, other sectors contribute to greenhouse gases (GHG) emissions significantly. The ‘hard to abate’ sector, for example, refers to those industries that are difficult to decarbonize due to embedded processes that require extreme heat — the top three being the cement, steel, and chemical industries. By comparison, the energy sector is often regarded as having a clearer pathway to decarbonize. This ‘hard to abate’ sector demonstrates the level of complexity we face during the low-carbon emission transition.

Climate-related risk

While many forward-looking companies in the region are already taking action to reduce their impact on rising temperatures and boost their resilience, the specific timelines and exact outcomes of the evolving climate change threat remain unclear.

We do know that MEA businesses will be impacted by risks that fall into two unique categories.

Transition risk

Transition risks are business-related threats that follow a global shift toward a low-carbon future. These risks revolve around several factors, such as:

  • Policy and legal
  • Market
  • Technology
  • Reputation

Key to the transition to a low-carbon economy will be innovation and the adoption of new technologies. This will play into transition risk substantially as these areas are likely to lack previous claims data and may also incur early stage losses while they are being embedded.

Physical risk

Extreme weather events, water crises and the loss of biodiversity are all physical risks experiencing increases in severity due to climate change. These can be divided into two categories:

  • Acute
  • Chronic

Acute physical risks can be characterized as those arising from extreme events, including severe weather like flood (as experienced in KwaZulu Natal in South Africa in April 2022), drought and storm. The insurance sector is well versed in responding to acute risks — and has generated significant historical data, which is used to model these threats.

This insight is also used by the industry to understand how to build resilience against these risks, and implement any needed mitigation efforts.

Chronic physical risks can be characterized as those borne out of changes that are occurring over a long period of time, rather than being event-based like acute risk. For this reason, chronic risks are harder to link to losses and quantify, making it difficult for insurers to identify triggers and create market-worthy products.

Many chronic risks associated with climate change are new, and insurers mostly lack the insights needed to underwrite them.

Companies and insurers in the Middle East and Africa need to work together closely to build a better understanding of the potential insurance triggers for chronic risk. Ultimately, the more insurers know about chronic risk, the better placed they are to help companies creatively manage it.

Information from the transition planning of companies could play a huge role in the leveling up of understanding of acute versus chronic risks — and climate-related disclosure will be pivotal in facilitating the transparency needed.

The climate-related risks classified by TCFD

In the global bid to tackle the climate change challenge, businesses all over the world are entering a vulnerable phase.

Key challenges for business:

  • The physical risks associated with climate change.
  • The need to address transition risks as the world moves towards a low carbon economy.
  • Changing consumer and investor preferences towards sustainable products and services.

Preparing for the above not only builds business resilience for tomorrow, but is rapidly becoming essential for a competitive edge today.

The TCFD and its role in fighting climate change

The Financial Stability Board — an international body that monitors the global financial system — developed the Task Force on Climate-related Financial Disclosures (TCFD) to standardize and improve reporting of climate-related financial information.

Since the original TCFD’s recommendations were released in 2017, they are now compulsory for listed businesses in a growing number of countries around the world and considered global best practice even where reporting under TCFD is not compulsory. By embracing the recommendations, leaders can better assess the risks surrounding climate change and create business strategies that deliver long-term value.

Whether TCFD compliance is compulsory in your country and industry or not, the interconnected nature of economies, sectors, and global markets means that your MEA business will likely be impacted at some point in the near future.