Environmental Risk Outlook 2020 - Executive summary

2020 was supposed to be a transformational year for the environment. The end date of a raft of corporate sustainability goals, the year when the curtain falls on Kyoto, and the Paris Agreement officially kicks into gear. But now we’re here, it’s clear business and governments are falling short of what needs to be achieved. Over the last 12 months alone, we’ve seen the Amazon and huge swathes of Australia on fire, Typhoon Idai claim more than 900 lives in southern Africa, while record temperatures became the new norm around the world.

The next decade is crucial in how business defines its relationship with the environment and in what steps governments take to secure the future against the impacts of climate change and the degradation of our natural capital. We’re already seeing pathways emerge at the start of this pivotal year. Our 2020 Environmental Risk Outlook delves into the latest developments and unpacks some of the primary issues shaping the way organisations do business in the months and years ahead.

Sea level rise, climate disclosure, regulatory rollbacks, protests, and deforestation key issues to watch

Zooming out to what will be a key issue for long term investments, we start by focusing on sea level rise. The prospect of our cities being gradually swamped by rising tides seems a long way off, but scientists warn that with no sign of global emissions slowing the increase in sea levels will be faster than projected. What this means is that investment decisions taken this year for roads, power plants, data centres, shopping malls and anything else we would expect to be around in 50 years will need to factor in sea level rise.

Furthermore, companies are going to have to get better at forecasting these kind of threats to satisfy mounting investor demand for greater transparency around climate change-related risks. Momentum around the recommendations from the Taskforce on Climate-related Financial Disclosures (TCFDs) will continue but, as we outline, corporates are still struggling to project future threats. Unless they can get this scenario analysis in order soon, not only will their creditworthiness take a hit, but the prospect of costly mandatory disclosures and financial penalties will loom large.

We will also need a step-change in government action. And yet, in the US, Brazil, India and, potentially in a post-Brexit UK, environmental regulations are being rolled back, placing a greater responsibility on business to ensure that standards are met. A critical question will be how companies manage variations in environmental standards between – and even within – countries. What is certain, though, is that attempts to water down laws will be met by legal challenges and protests.

An evermore environmentally-conscious society isn’t going to let standards slip without a fight. We expect the wave of protests we saw across 2019 on the back of Greta Thunberg’s Climate Strike and the increasingly influential Extinction Rebellion to continue and intensify. This means fossil fuel companies will need to manage a host of new reputational risks while, at the same time, fending off shareholder resolutions and facing down legal challenges over their role in driving climate change.

Indeed, a company’s entire environmental performance is now coming under more scrutiny from shareholders and customers. Outside of climate change, a key metric for corporates to address is deforestation – no surprise given the fires in the Amazon, California and Australia, and the strong links between commodities and forest loss. Companies will increasingly have to justify the impact of their operations and supply chain, which is no easy task when visibility beyond tier 1 suppliers is almost non-existent.

Time is running out. During 2020, companies must work out how to tackle operational and reputational risks linked to company impacts while managing new regulatory pressures as governments respond to environmental thresholds being breached. Given the current rates of global emissions and environmental degradation – and consumer demand to deal with these pressures – companies cannot afford to let 2020 pass them by.