Climate change presents business risks that are unique in that “the impact is global, the problem is long-term, and the harm is essentially irreversible” (Lash and Wellington 2007). Applying traditional environmental risk management to climate change helps the firm create a risk profile that considers regulatory compliance, potential liability, and mitigation options of GHG emissions. However, crafting a suitable response must address the financial and competitive consequences of climate change (Lash and Wellington 2007).
Companies that manage and mitigate their exposure to climate-change risks while seeking new opportunities for profit will generate a competitive advantage over rivals in a carbon-constrained future(Lash and Wellington 2007). Therefore, building long-term competitiveness involves action on two parallel fronts: reducing exposure to climate risk and creating new opportunities for profit. Climate risk includes the physical exposure, reputational and policy risks discussed in previous sections. Mitigating these risks is key. Acting on the opportunities involves integrating climate change into corporate strategy and planning.
Competitive risk measures to what extent the consequences of climate change affect the viability of firms in an entire sector. Each climate risk criterion introduced in preceding sections has the potential to disrupt a firm’s operations or force a rethinking of a sector’s business model. Physical changes can disrupt supply chains, jeopardize the availability of raw materials, and even cause unexpected shifts in demand. Climate policies can decrease support or increase regulation for high-carbon sectors. Negative consumer perceptions about a firm’s stance toward climate change can impact revenues and growth prospects.
In contrast, climate risks can also create new business opportunities, open up new markets, and delineate new customer segments. There is a clear opportunity for companies to influence and reduce their customers’ emissions, by enabling and encouraging new and more energy-efficient ways of living and working. Public sector regulation can create entire new sectors and markets such as clean energy and carbon trading. Climate change has become a mainstream consumer concern, thus firms that act beyond basic legal requirements can add value to their brands and differentiate from competitors.
Our conceptualization of competitive risk reflects the degree of preparedness of a sector and firms to ensure business-continuity in the face of the trends discussed above. Competitive risk also reflects the perceived difficulty of sectors and firms to cope with climate risks. Most importantly, the competitive risk dimensions encodes perceptions over the viability of a firm’s business model as the competitive landscape adapts to a different climate, increased regulatory oversight, and heightened legal and consumer scrutiny.