Acclimatizing to climate risk

Global sustainability strategy consultancy SLR published the annual Actions for Business report, which explores the topics it believes will shape the responsible and sustainable business agenda this year.

Among them is climate risk mitigation, a task that involves identifying and quantifying associated impacts to formulate a business resilience strategy.

To find out more and get a regional view, BNamericas speaks to Ana Amar, Latin America director at SLR.

Actions for Business is produced by consultancy Finch & Beak, acquired by SLR in 2022.

BNamericas: An important challenge identified in the Actions for Business report concerns mitigating the climate risks of companies. Could you give us examples of some specific/concrete risks?

Amar: Climate change will generate different potential risks and opportunities for companies, depending on their business model and activities and the locations where they operate. For this reason, it is necessary for companies to carry out an analysis that considers their own specific context. 

Climate change is already causing, and will continue to cause, physical changes in temperature, precipitation, sea levels and other variables. In some areas, the risk of water shortages will increase, which could cause crop failure, impacting the price and availability of agricultural commodities. Heat waves and dry conditions also contribute to the spread of wildfires, a threat to property, infrastructure, and the safety of employees and customers. 

On the other hand, the process of decarbonizing economies to mitigate the effects of climate change will drive regulatory, market, legal changes, and changes in consumer habits and expectations that can create challenges for companies. For example, in Chile and other countries, regulation already puts a price on carbon, so that emitters are forced to pay the social cost of their activities. This measure was also proposed in Brazil. 

BNamericas: Compared to their peers in other regions, are companies based in Latin America more exposed to this risk? 

Amar: A study from the University of Notre Dame finds that Latin American countries are relatively more vulnerable and less prepared to face the risks of climate change than regions such as North America, Europe and [Australia and Asia], but are less exposed than the most vulnerable countries in Central Africa, sub-Saharan Africa and southern Asia. 

One complexity for companies operating in multiple locations is that risks vary greatly by geography, with large parts of Chile exposed to increasing water shortages. On the other hand, other areas such as Brazil may be exposed to more intense rainfall and risks of flooding. This also applies to regulation, which is not uniform in all Latin American countries. 

However, companies in all countries are exposed to potential risks. Swiss Re identifies the United States as the country with the second-highest economic exposure to climate change by annual probabilistic economic losses as a percentage of GDP.

BNamericas: According to the report, it is urgent that companies provide visibility of their energy transition strategies, as investors and auditors increasingly demand this information. What would be typical pillars of an energy transition plan? 

Amar: A transition plan describes the objectives, actions and investments that an organization will implement to align with the transition to a low-carbon economy.

This should contain three main elements: (1) emissions reduction objectives and strategies that cover the company's operations (scope 1 and 2) as well as its supply chain, products and other value chain activities (scope 3); (2) how the company will respond to emerging risks associated with physical changes and the transition to a low-carbon economy; and (3) how the company’s business model aligns with and supports the transition to a low-carbon economy through its products and investments, among other elements. 

BNamericas: Talking about ESG in general, have you noticed any trends in the region regarding compliance with ESG criteria? For example, regarding the proportion of companies starting to focus on this area. 

Amar: Yes, we have seen important advances in the recognition and compliance with ESG criteria in the region and adoption of international standards. There are companies in Latin America that are global leaders within their industries, such as Empresas CMPC, which in 2023 was rated by S&P as the most sustainable company in the global forestry and paper products industry.

However, these advances have not been uniform across all countries, sectors and companies. There remains a gap to improve transparency and measurement, integrate ESG criteria into the company's business model and core strategy, and deliver the sustainable solutions, products and services needed to drive the equitable, and low-carbon, transition of our economies. 

BNamericas: In Latin America, a tremendous percentage of companies are SMEs, among them suppliers to larger companies. Many of these SMEs do not have ESG staff or many resources, but they are still exposed to climate risk and may one day have to demonstrate compliance with ESG criteria to their buyers. It seems that this situation presents challenges, but also opportunities. How could this segment face this situation? 

Amar: While it is essential to see actions among the companies and sectors that contribute the most to global greenhouse gas emissions, economy-wide initiatives are required to mitigate and adapt to climate change, including SMEs. 

To manage their sustainability impacts, large companies must look beyond their direct operations and consider ESG impacts within their supply chains, and this includes establishing measurements, criteria and targets for SMEs.

Some large companies and industry groups are already providing tools and resources that help their suppliers understand ESG and carbon issues and take action. For example, Codelco provides a carbon footprint calculator to its suppliers, allowing them to perform this analysis and improve data quality. Schemes such as the Science Based Targets [corporate climate action] initiative also provide specific guidance for SMEs to enable them to take part.

On the other hand, it is necessary for the government to establish a regulatory ecosystem that supports SMEs in making sustainable decisions. For example, energy markets could be reformed to allow them to purchase certified renewable energy.