The Cost of Inaction 2024

The CEO Guidebook to Managing Climate Risks FIGURE 21 – Establish or adapt risk, financial & strategic governance – Embed climate risk into decision processes– Create a culture of climate risk awareness & innovation – Cascade climate risk ownership throughout business units & functions– Build & adapt tools to measure climate risks & opportunities – Build capacity & know-how to understand new types of risks & opportunities– Measure physical risks – Evaluate transition risks – Identify climate-related opportunities – Invest in adaptation & resilience – Decarbonize assets & operations – Decarbonize business portfolio – Set up climate risk monitoring – Disclose material exposure – Disclose adaptation activities – Reshape business portfolio – Capitalize on physical resilience – Align capital allocation with climate strategy Conduct a comprehensive climate risk assessmentManage risks in current business portfolio Pivot your business to unlock opportunitiesMonitor risks & report on progress Upgrade climate risk governanceIntegrate climate risk into business-as-usual Develop effective climate risk systems Source: BCG analysis Conduct a comprehensive climate risk assessmentStep 1 In past years, global leaders have consistently ranked extreme weather events and climate disasters among the top five global risks.60 Cascading effects such as the failure of climate action, biodiversity loss and critical changes to earth systems have recently risen to prominence, reflecting the growing recognition of longer-term impacts. Climate risk assessment should be firmly grounded in scenario-based analysis across three key areas: measuring physical risks, evaluating transition risks and identifying climate-related opportunities. To build a comprehensive view, companies should assess these dimensions in the context of their own exposure, their supply chain and the broader societal and economic impacts.Measure physical risks The assessment of climate hazard threats to a company’s key assets should be performed by applying different warming scenarios and time horizons. Both exposure (how likely are hazards?) and vulnerability (how severe could the damage be?) should be considered – across asset types, value chain steps including the supply chain, and types of hazards such as floods, droughts and wildfires. Once identified in a structured way, risks can be quantified either by using a scoring approach or a more precise (and more complex) financial approach: Quantification by scoring uses vulnerability matrices and climate hazard data to generate risk scores based on the vulnerability of an asset type. It enables companies with limited prior knowledge of their climate risks to identify high-risk hotspots that need deeper consideration (see Case Study 2). In past years, global leaders have consistently ranked extreme weather events and climate disasters among the top five global risks. The Cost of Inaction: A CEO Guide to Navigating Climate Risk 38