Climate risk is real. Global warming is shaping business trends worldwide. Investments in renewables have exponentially risen. The move away from carbon-based energy is real.
The change in energy sources will cause tectonic environmental, technological and social change. Fossil fuel reservoirs will become stranded assets. Carbon energy-based economies will get directly hit. The spillover impact on businesses worldwide will be far-reaching.
An investor’s success depends on the ability to assess business risk as accurately as possible. Companies are analyzed for various risks before making an investment decision. Therefore, it is natural for investors to now start studying climate risk in a business before deciding to invest.
Businesses also have to factor in the shift away from carbon energy. The resultant technological change will be massive. Boards must understand the evolving climate-driven changes and drive operational change, social behavior, and governance models. These changes are causing countries to undertake policy and regulatory changes.
Investors are beginning to factor in risks from climate, their impact on society, and the governance of companies. All this is fueling ESG investing.
Sudhir Ahluwalia is a professional business strategy expert from Wharton, a business consultant with decades of experience in natural resources.