The growing climate risk

The threat of climate change presents us all with new financial challenges. Let's look at natural disasters, for example: In 2021, natural disasters caused damage totaling 280 billion US dollars. The most expensive was Hurricane Ida, which alone was responsible for 65 billion dollars. In Germany, flash floods following heavy rainfall caused around 8.2 billion euros in damage - the most expensive consequence of climate change for Germany to date.

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These catastrophic natural events are a reason for companies to commit to climate strategies at national and international level. However, there are many other incentives for companies:

• Threats to the supply chain
• State requirements
• Pressure from stakeholders such as customers, employees and investors.

Climate protection measures are being implemented in every industry - a rapid development that has been compared to the beginnings of digitalization. The financial market will of course not be spared from these challenges and must remain robust if legal and regulatory measures lead to a shift away from fossil fuels.

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Why climate risks are relevant for investors

As the predicted and already tangible dangers of climate change become the focus of investor attention, experts are predicting the largest restructuring of capital in history and a radical upheaval of value pools that will create new market leaders and losers. A PwC report predicts that by 2026, ESG-focused institutional investments will be worth up to USD 33.9 trillion.

"Climate change has become a decisive factor for the long-term prospects of companies... Climate risk is an investment risk. As trustees, it is our job to help our clients navigate this change. We believe that sustainable and climate-integrated portfolios can deliver better risk-adjusted returns."

Larry Fink - CEO of BlackRock
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Investors have long called for frameworks with clear criteria for assessing climate change and its impact on the financial sector to provide transparent insight into a company's prospects. In 2020, 631 investors managing more than 37 billion dollars signed a global investor declaration, which was presented to governments worldwide. The aim was to improve climate-related reporting and "commit to implementing the TCFD recommendations in their countries". To date, most companies in the EU carry out climate change reporting on a voluntary basis - however, from 2024 to mid-2026, the new EUCorporate Sustainability Reporting Directive (CSRD) will be introduced and this reporting will become mandatory for most large companies.

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What are the different types of climate risks?

The analysis of climate risks is very complex for companies.

First of all, there are the acute physical risks, such as the damage caused by extreme weather events like storms or floods. However, chronic physical threats such as rising sea levels, temperature changes or increasing droughts in certain regions are also analyzed. These risks threaten locations, supply chains and entire value creation networks - both in the short and long term.

The path to climate neutrality also entails a number of other so-called"transition risks", i.e. financial risks that arise directly or indirectly from the process of adapting to climate change. These include

• Rising energy and raw material costs in the value chain
• Regulatory risks, such as state control of emissions trading
• Legal risks such as laws or sanctions
• Risks to a company's reputation due to changing consumer attitudes

With so many uncertain factors, it is not surprising that a comprehensive review of the various risks and plans to minimize them is becoming increasingly important for investors.

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Increased importance for food companies

Companies in the food industry are particularly exposed to risks from climate change. The greatest risks lie in the upstream value chain. The agricultural sector is one of the first industries to feel the effects of climate change. The "transition risks" for the food industry are also high, as food production accounts for ¼ - ⅓ of global greenhouse gas emissions, depending on the source. For companies in the food industry, assessing corporate and external climate risks is therefore both a major challenge and extremely important in order to guarantee their future viability.

Regenerative agriculture is a solution strategy to mitigate these risks, signaling to investors that your company is committed to supply chain resilience. Klim helps to implement regenerative measures in the supply chain to reduce the climate impact of your food production and increase the resilience of crops to the effects of climate change. Properly implemented, regenerative agriculture is a way to increase security of supply in a rapidly changing climate.

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Find out more about how Klim can support you as a partner in making your supply chain more resilient to climate risks.

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