Why SMEs need to manage climate risk – now
By Rikki Stancich and Louise Aitken
Supply chains are the weakest link when it comes to climate vulnerability. For climate reporting entities such as banks, insurers, fund managers, and large listed issuers of debt and equity, this is problematic. This is because the new climate disclosure rules mandate them not only to report how they are managing climate risks within their direct sphere of control; they also need to disclose how they are managing indirect risks – the risks residing up and down the value chain. In addition to this, reporting entities are required to seek assurance over the numbers and the facts they disclose. The result? Climate Reporting Entities (CREs) are now holding their value chains to account for reducing emissions; and for managing physical climate risk exposure. Put simply, they will be asking their suppliers to provide emissions data, and evidence of implementing climate change adaptation measures.
For borrowers, investees, and first and second-tier suppliers, this carries risk and opportunity in equal measures. The key risk lies with inaction or delayed action. Suppliers, buyers, and borrowers who are unable to demonstrate that they are actively reducing their emissions and reducing their exposure to physical risks, will be less likely to succeed in procurement rounds, and will face higher-cost debt and insurance over time. Conversely, proactive mitigation and resilience measures will confer a competitive advantage, not only in procurement rounds, but more generally, in terms of commercial advantages.
Opportunities abound
No fewer than 85% of leading organisations surveyed by Deloitte are developing new climate-friendly products or services, emphasizing the link between innovation and climate action. Examples of how effective emissions mitigation and resilience work in tandem to yield commercial benefits, are plentiful. In recent years, agrivoltaics (solar and agriculture co-location) has repeatedly demonstrated combined benefits of energy security, energy price stability and crop resilience, where solar arrays on vineyards, for example, shield vines from frost, wind exposure, and heat waves, while simultaneously improving quality and yield. Lincoln University is developing New Zealand’s first commercial scale agrivoltaic farm, which combines photovoltaics with berry crops. Scheduled to come online mid-2025, the project aims to demonstrate how land productivity can be optimised by combining high-value horticulture crops with commercial-scale solar energy generation.
Cooling and refrigerants is another area where technology advances are yielding material cost savings for businesses - some solutions are shearing over 50% from energy bills. Here in New Zealand, AoFrio was recently singled out by the Beverage Industry Environmental Round’s ‘Cool Challenge’ award for its ‘AoFrio Inside’ solution that is touted as being capable of generating energy savings of up to 64 percent. Technological advances and cost savings are being driven by energy efficiency labelling rules in the US and EU. In 2022 annual EU consumer energy costs were reduced by €90bn due to energy efficiency labelling. The European Commission estimates these annual cost savings will increase to €150bn per annum by 2030.
Show me the money
Acting now to both mitigate and adapt to climate change provides significant commercial benefit in addition to procurement opportunities. Discounted finance is available to commercial enterprises small and large, to support decarbonisation, energy efficiency, waste management, sustainability and climate resilience projects. The majority of New Zealand’s large retail banks offer loan packages and incentives designed to encourage and support small, medium-sized, and large commercial entities to actively manage and mitigate climate risk.
Chief among the (multiple) reasons why banks are offering these incentives is because they, along with investors and insurers, are under regulatory pressure to decarbonise and de-risk their portfolios. Consequently, high emitters, and customers with enduring high exposure to physical climate and nature risks, are likely to be managed out of portfolios over time through increased finance and insurance costs. In this regard, acting early to lock in preferential rates to finance emissions reduction investments, such as process heat electrification, fleet electrification, or commercial building retrofits, and to finance climate resilience initiatives, will deliver both short-term and long-term benefits. Linking these investments into your long-term strategy provide signals to investors, customers, employees and wider stakeholders, that you are actively managing risk and harnessing opportunity.
Batten down the hatches
The biggest risk to small, medium, and large businesses is lack of preparedness, leading to asset damage and loss, and loss of business continuity. When storms hit, they leave a destructive wake of flood damage, power and communication outages, property damage, access impairment and health and safety risks. Being prepared, understanding and anticipating climate risks, and bolstering resilience gives businesses the best chance of weathering the storms. Research by Deloitte in New Zealand revealed that that common physical climate risks reported by climate reporting entities are increased asset damage and replacement costs; productivity loss due to operational disruptions; increased operational costs and margin compression; and supply chain shocks due to resource scarcity.
Where - and how - do you start?
Reporting entities will be demanding more data on emissions reduction performance and climate risk management. Given that the climate reporting entities face assurance mandates linked to climate disclosures, they will actively seek out and favour customers and suppliers that can provide robust emissions and climate risk data. The following steps ensure that you are anticipating and able to readily respond to market demand:
Step 1: Manage, reduce, and report your Greenhouse Gas Emissions
- Establish your emissions inventory.
- Set an emissions reduction target.
- Determine your emissions reduction strategy through a cost-benefit analysis of emissions abatement investments or energy efficiency initiatives and embed it into your overall business strategy.
- Track and report your emissions reduction performance.
- Communicate your progress and share your ambition for the future.
Step 2: Understand your exposure to climate risk and develop a resilience plan
- Map out your value chain and identify climate vulnerabilities.
- Establish the boundary of your climate risk assessment.
- Identify Physical and Transition risks and opportunities.
- Rate your exposure, sensitivity, and adaptive capacity to climate-related impacts.
- Identify your most material risk exposure and identify and cost out your adaptation options.
- Communicate your progress.
Merge the outputs of Steps 1 & 2, and you have a robust transition plan that demonstrates to customers that you are managing your climate risk exposure; which in turn, gives them confidence that their indirect climate risks are being addressed, and that their supply chain is resilient.
Sound complicated? It doesn’t have to be. If you prefer a hands-on guided process that delivers relevant and practical outputs , Deloitte’s ’Build your carbon inventory’ and ‘Climate Risk Assessment for the Value Chain’ workshop series provides a practical process designed to maximise knowledge transfer, that steps you through the process and equips you with a complete, robust, assurance-ready GHG inventory and climate risk assessment report at the end.
Our group learning, modular workshop series is facilitated by Deloitte’s dedicated climate risk and resilience team and gives you first-hand access to the latest climate science, data, world class tools, training and insights. Our fees and modular course structure can be tailored to fit needs.
Click here to register your interest.
There are also multiple free toolkits that have been designed to assist small, medium, and large enterprises to establish greenhouse gas inventories and undertake first-pass risk assessments (refer to the list below).
