The Business Risks of Carbon Emissions, Explained

The business landscape is changing, and carbon emissions are at the center of the shift. Climate-related risks—ranging from extreme weather to regulatory pressure—are already disrupting operations and reshaping industries. A recent study of 15,000 public companies by University of Chicago economists revealed a stark reality: if businesses were held financially accountable for the damage caused by their emissions, they could lose nearly half of their profits.

But the risks don’t stop there. Severe weather events, supply chain disruptions, and increasing demands from consumers, investors, and regulators are challenging companies to take swift climate action. Those who fail to address their carbon footprint risk losing market share, damaging their reputation, and facing financial penalties.

To navigate this evolving landscape, businesses must understand the connection between carbon emissions and business risk. In this article, we’ll break down the types of carbon risks, explore their impact on businesses, and share actionable strategies for mitigation.

What are carbon emissions? 

Carbon emissions refer to the gases that are released into the atmosphere by human activities, driving climate change. 

Emissions primarily come from the burning of fossil fuels for energy and transportation, as well as agriculture, land-use changes, and industrial processes. The Greenhouse Gas Protocol (GHGP) has identified different types of emissions for the purposes of spurring reductions and preventing the worst impacts of climate change.

These categories include: 

Scope 1: These direct emissions come from sources controlled or owned by an organization — for example, a company’s vehicles or furnaces. 

Scope 2: These indirect emissions result from electricity, steam, heat, or cooling that an organization purchases for its operations. 

Scope 3: These indirect emissions typically make up the majority of an entity’s carbon footprint. They come from sources up and down the value chain – any emissions not covered by scopes 1 and 2. Examples of scope 3 sources include supply chain activities, business travel, and the use and disposal of products a company produces. 

What is the significance of carbon emissions? 

Reducing carbon emissions is the key to mitigating climate change. 

Carbon emissions are the primary driver of climate change, contributing to rising global temperatures and intensifying environmental challenges such as extreme weather events, sea level rise, and biodiversity loss. Reducing these emissions is essential to mitigating climate change and safeguarding our planet’s future.

Scientists have emphasized that to avoid the most catastrophic impacts of climate change, we must dramatically reduce greenhouse gas emissions and limit global warming to well below 2 degrees Celsius above pre-industrial levels, with an aspirational goal of 1.5 degrees. Achieving this requires urgent action across all sectors of society.

In response to this global challenge, organizations worldwide are adopting Science-Based Targets (SBTs) for emissions reductions. These targets align with climate science, providing a clear pathway for companies to decarbonize their operations, reduce their carbon footprints, and contribute to a more sustainable future. Setting and achieving these targets has become a cornerstone of corporate sustainability efforts, driving innovation, accountability, and meaningful impact in the fight against climate change.

What is climate risk? 

Climate risk refers to potential damage to the environment, businesses, or society from climate change. 

In this article, we focus on the range of hazards climate change poses to businesses — from extreme weather to reputational damage and loss of access to capital. It’s crucial for businesses to understand these risks so they can develop strategies to mitigate them. 

Climate-Related Business Risks

Climate-related risks are increasingly material to businesses and are broadly categorized by the Task Force on Climate-related Financial Disclosures (TCFD) into physical risks and transition risks, with additional financial implications arising from these categories. Here's a breakdown of each:

1. Physical Risks:

Physical risks arise from the direct impacts of climate change, including acute and chronic events that disrupt operations and supply chains:

• Acute Risks: These include sudden, severe weather events such as hurricanes, floods, wildfires, and extreme heatwaves. Such events can damage assets, disrupt operations, and increase insurance premiums.
• Chronic Risks: These involve long-term shifts in climate patterns, such as rising sea levels, persistent droughts, and temperature increases. These changes can degrade infrastructure, disrupt resource availability, and increase operational costs over time.

2. Transition Risks

These risks stem from the economic, regulatory, and societal shifts required to transition to a low-carbon economy.

• Regulatory Risk: Governments are increasingly introducing carbon-related regulations, such as carbon pricing (e.g., taxes and cap-and-trade systems), emissions reduction mandates, energy efficiency requirements, and climate disclosure policies. Non-compliance with these regulations could result in fines, increased costs, or even loss of market access.
• Market Risk: As economies transition to low-carbon energy sources, companies that rely on fossil fuels may face reduced demand for their products or higher costs. Competitors offering greener alternatives may capture market share, while industries like coal, oil, and gas see shrinking markets.
• Reputation Risk: Customers, investors, and other stakeholders are increasingly favoring companies with strong sustainability practices. Companies that are seen as lagging behind in carbon reduction efforts or contributing heavily to emissions may face reputational damage, losing business or investment.
• Technological Risk: The transition to cleaner technologies can feed competitive pressure. Companies that fail to adopt new, low-carbon technologies may fall behind peers that are more advanced in their decarbonization efforts.
• Litigation Risk: Companies may face lawsuits related to their contribution to climate change, failure to comply with climate regulations, or inadequate disclosure of climate-related risks. Legal action can also result from misleading sustainability claims or failure to meet climate-related financial disclosure standards.

3. Financial Risks

The financial implications of physical and transition risks can manifest in various ways:

• Increased Operating Costs:
  Carbon pricing mechanisms (e.g., taxes, cap-and-trade systems) and rising energy costs for carbon-heavy fuels can inflate operational expenses.
• Access to Capital and Valuation:
  Investors and financial institutions increasingly assess carbon risks when making decisions. Companies with significant carbon exposure may face higher borrowing costs, reduced credit ratings, or declining valuations due to perceived long-term risks.
• Asset Stranding:
  High-carbon assets (e.g., coal plants, fossil fuel reserves) may lose value or become obsolete as the world transitions to cleaner energy sources. Businesses heavily invested in such assets may experience significant financial losses.

Strategies for Mitigating Carbon-Related Risks

Clearly identifying the carbon risks your company faces will allow you to design a plan to effectively address them. A strong risk management strategy will include the following steps: 

1. Develop a Carbon Management Plan

It’s important to set measurable, realistic goals for decarbonization, and implement sustainable practices that will yield the highest emissions reductions. 

2. Engage Stakeholders

Successful mitigation of any business risk demands buy-in from stakeholders, and climate risk is no different. It’s crucial to build partnerships committed to sustainability and to be transparent with customers and investors as you set emissions targets and take steps to decarbonize.

3. Invest in Technology and Innovation

New technologies for carbon accounting can serve as powerful tools for managing carbon risk and making efficient reductions. For example, US-based Caliber, a collision repair company with $7.5B USD in annual revenue, used Persefoni to calculate more than 700,000 emissions data points across 1,800 different facilities so it could report to investors with confidence. In the process, Caliber’s team learned that 70% of their emissions came from scope 3 sources, and they are now asking their suppliers to calculate and share their data using Persefoni's free platform, Persefoni Pro. 

Building a Resilient Future Through Carbon Management

The hazards posed to businesses by climate change are only growing. Physical risks like floods, storms, and drought are already impairing supply chains and operations, while transition risks like new regulations are ratcheting up pressure to decarbonize. Failure to keep up can lead to substantial losses in the form of higher operating costs, diminished access to capital, and even stranded assets. 

To succeed in this environment, businesses must tackle their climate risks head-on. They can start by using the free, user-friendly software provided by Persefoni Pro to establish a baseline picture of their emissions. With reliable data, they can create effective carbon management plans — and future-proof their organizations.