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CLIMATE CHANGE STRATEGY

Risk based assessment

The world is moving to a low carbon future and an energy transition is under way. The Paris Agreement commits to limiting global temperature rise to below 2 degrees C, which implies emissions reductions are required in all nations. Companies should be taking into account risks associated with climate change and analysing performance under different scenarios for climate change action. Risks associated with climate change can arise from:

  • Transition risks - these cover policy changes from national and sub-national Governments to address climate change and help meet international emissions reduction targets. Current and future policy implications and the potential costs on companies are explored and quantified to determine the overall financial risk to the business under different climate change action scenarios.

  • Physical risks - the physical risks of climate change could include exposure to extreme weather events, sea level rise and the resulting impact on infrastructure, and access to resources such as water and other production inputs. Physical risks directly on a facility and through the upstream supply chain should be investigated.

  • Social license risks - social license is a key enabler for continued operation of a company. Stakeholders in the public are becoming more aware of environmental issues and taking a deep interest in the behaviour of companies, particularly with regard to climate change.

engeco analyses and quantifies the impacts of these risks on the triple bottom line performance of companies. Appropriate risk management measures are then devised and business cases for those measures prepared. The implementation of these measures forms the backbone of a robust climate change strategy.

Similar analysis of climate change risks can also be used by investors and lenders when determining whether to invest in or lend to a particular project or company. The risk of a stranded asset may be high for certain types of project, depending on different scenarios for climate change action, forecast commodity prices and where the project sits on the cost supply curve. This analysis should form part of the due diligence prior to making a decision on investment. Lenders may decide to apply a higher cost of capital for certain types of project as a result.