In brief

Just 40% of CEOs have factored climate change into their risk-management strategies, according to PwC’s 2021 Global CEO Survey. This is a big mistake. A warming planet is a world of extremes—more damaging floods, droughts, storms, wildfires—and greater societal challenges. For companies, the costs are already enormous: insured losses from natural catastrophes rose to US$112 billion in 2021, continuing a trend of an annual 5 to 6% increase in losses over recent decades. And that’s just the property damage. The cost of business disruption is greater still, not to mention the risks to employees’ lives and livelihoods.

Climate risk exposure for major industries

In brief

1. Adapting to climate perils

2. Meeting steep net-zero commitments

3. Building the net-zero world

Unlikely metrics

Dive deeper: Time to get serious about the realities of climate risk

November 2022

More issues More from s+b Podcast pwc.com

Source: PwC analysis

It’s easy to be overwhelmed by the challenge of climate change. The barrage of bad news, the size of the problem, the existential stakes involved—it’s all too easy to succumb to numbness, then inertia. But we don’t have to. We can do better. And we need to hurry. We don’t have much time...

In depth

Understand the problem

Contact us

Richard Abadie Global Leader, Capital Projects and Infrastructure, Partner, PwC United Kingdom Email

Emma Cox Global Climate Leader, Partner, PwC United Kingdom Email

Casey Herman Leader, ESG Practice, Partner, PwC United States Email

Nicole Röttmer Climate Change, Partner, PwC Germany Email

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...but by breaking down big challenges into smaller ones, companies can find—and create—opportunities.

First among those challenges are the floods, wildfires, droughts, and other natural calamities that are occurring with ever greater frequency and intensity. Some companies, confronting the risk these threats pose to their extended operations, are building greater resilience—and in some cases, finding new markets. The second challenge is equally urgent: decarbonization—starting with how to measure the carbon embedded in global supply chains. In the race to net zero, many organizations are embracing the challenge of measuring the full extent of their carbon impact—and learning from the experience. From modest, admittedly imperfect beginnings, they are poised to benefit from stronger relationships with their suppliers, customers, and employees, all while making progress toward their decarbonization goals. Finally, we present new PwC research highlighting a novel way to think about investment opportunities that address a third challenge: the looming green infrastructure crisis. The fact is, little of the sustainable infrastructure we need (and need quickly) has been built. The opportunity? Investing in the overlooked markets where green infrastructure is most desperately needed. All of these challenges will require leaders to roll up their sleeves and seek practical solutions. And that’s what we hope you take from this issue: that there’s no climate challenge too big to solve if we can simply get after it—and break it down.

1. Adapting to climate perils

Image of firefighters battling a forest fire

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Break it down

The climate risk in your pocket

The geographic specificity of physical climate risk gives you a place to start. Physical risk models that are grounded in climate science help predict the location and frequency of various hazards. Map these predictions to key locations along your value chain—offices, warehouses, manufacturing facilities—and you’ll see weaknesses and chokepoints.

Here’s a composite example of the impact that physical climate risks could have in the creation and distribution of a product everyone knows: the smartphone. (Note that this example highlights real locations across real smartphone value chains, but it doesn’t depict the activities of any one company.)

Smartphone supply chain climate risks, quantified

Explore the full interactive

Find the opportunity

You can’t stop the rain, but you can start selling umbrellas. That old saying holds more than a grain of truth when it comes to climate threats. That’s because the management discussions that arise from climate risk–mapping exercises don’t just help you bolster resilience and keep your people safe—they can inform innovation and strategy, too. Consider these examples of companies embracing changes after they gained a better understanding of how climate change would impact them.

A global industrial equipment maker learned that about 50 of its sites around the world faced elevated risk of either flooding or drought. As company leaders looked to improve their own business resilience, they also identified new products they could create to meet rising demand for climate-resilient offerings.

Green products

A conglomerate saw that extreme weather could cost it several hundred million dollars a year as soon as 2030. The enterprise-wide nature of the challenge got leaders thinking about the bigger picture. The company is now focusing on two opportunities: R&D to develop green products, and a strategic pivot into a fast-growing, adjacent business.

Strategic pivot

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Closing the green infrastructure gap

In conclusion

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—Craig Fugate, October 2022

Portrait by Noli Novak

[T]he climate has already changed. This is not something that’s ten years down the road. And while a lot of emphasis...has been about reducing greenhouse gases..., most companies have not looked at adapting to the changed environment they’re in. But the question is, how does the change impact your bottom line?”

Hear the former head of the US Federal Emergency Management Agency (FEMA) talk about preparing for climate-related disasters.

Listen to series

Dive deeper: Tackling the Scope 3 challenge

The work companies do to tackle S3 emissions can help strengthen relationships with suppliers and improve collaboration—outcomes that can lead to cost savings, new revenue-generating opportunities, or both.

Friends with benefits

While you’re assessing the carbon emissions across your product portfolio, your chief commercial officer can be looking at which products offer the greatest revenue opportunities for creating lower-carbon versions, and can determine which customers might be most receptive to them.

Better market intelligence

Leaders who approach S3 reporting as a mere compliance exercise miss the chance to learn from their suppliers and customers. Make learning part of your S3 strategy and you just might gain the following.

Find the opportunity

Stay close to the data. You can save time by having third-party providers collect and report your company’s S3 data, but if your people are too distant from the actual calculations, you may later struggle to understand your own S3 footprint—and its implications.

Your new 80/20 rule

The good news: 80% or more of your S3 emissions are likely concentrated in the activities of just 20% of your suppliers. Start there. And remember that an incremental approach to data collection beats nothing at all. As you dig in, keep three things in mind:

Break it down

To make sensible decarbonization plans—and see them through—you’ll need to better understand, and measure, your company’s carbon footprint. This includes Scope 3 (S3) emissions: basically, the greenhouse gases generated in your company’s upstream and downstream value chain, which can represent 65 to 95% of the total. But how do you do that across thousands, or tens of thousands, of suppliers? Oh—and whether you pledged to decarbonize or not, governments around the world are gearing up to hold you to account by reporting your S3 emissions anyway.

Understand the problem

Row of electric cars with closet one being charged

2. Meeting steep net-zero commitments

TELL ME MORE ABOUT EMISSIONs SCOPES

Greenhouse gas (GHG) emissions are classified into three categories, or scopes.

What are Scope 1, 2, and 3 emissions?

Scope 1 Direct emissions from things your company owns or controls Example: GHG from the fuel you burn in company cars

Scope 2 Indirect emissions from the energy your company purchases and consumes Example: GHG created in generating the electricity you purchase to heat the office

Image of wind turbines and power plant chimneys

Scope 3 All other emissions arising indirectly from your company’s upstream and downstream activities Examples: GHG created by a supplier in making the parts for one of your products, or GHG created when your product is consumed or disposed of

Image of hot steel rolls manufacturing process

Average isn’t great. Some modeling approaches to S3 data collection rely on industry averages. But what if your company isn’t average? You need granular S3 data to support management decisions and identify improvement areas.

Be a process hound. Overseeing the estimation, quantification, and extrapolation of S3 data across the business involves subjective choice and judgment. Put some process around those actions so that your people measure what matters—not just what’s easiest to measure (or what makes the company look good).

Watch: PwC’s Emma Cox talks with Microsoft’s VP for sustainability about Scope 3 emissions, and how tracking them can unlock business opportunities. Read transcript

Dive deeper: Closing the green infrastructure gap

At s+b, we’re not in the gambling business. But we’ll wager that many of the green infrastructure financing opportunities you uncover are likely to demonstrate that the countries where the will to decarbonize is strongest are not adequately registering with lenders, investors, and financiers. And for the world’s sake, isn’t it time they did?

Now, your turn

In general, Western European countries rank highly as destinations for green investment, but when it comes to green financing opportunities specifically, we see that Europe trails both Chile and Vietnam by wide margins. Why? When it comes to the three components of green financing—the pipeline for green infrastructure, green bonds issuance, and the availability of green official development assistance (ODA)—both Chile and Vietnam punch far above their weight, relative to average scores in our index. This suggests that the value of projects in these markets exceeds the two countries’ relatively modest GDPs.

Beyond the usual suspects

The green infrastructure tool lets you examine the ins and outs of how countries are meeting the investment criteria PwC studied. But please don’t assume causal relationships between any one criterion and a risk-adjusted ROI (that’s no better than assuming developed markets are ‘safe’). Nonetheless, by opening up new perspectives, you will see interesting possibilities. Consider the following insight, derived from the research.

Find the opportunity

How committed is the country to making sure green infrastructure projects are realized, and to reaching net zero?

What is the country’s enabling environment like for the financing of green infrastructure?

Investors tend to perceive developed markets as ‘safe’ and others as less so. But that’s too simplistic. A recent PwC study of 61 countries suggests that if you’re a would-be infrastructure investor, it’s worthwhile to scrutinize a range of investment criteria. Start with two questions:

Break it down

Greening the world’s energy production, transport, waste treatment, and other critical infrastructure will require massive investment, quickly. And most of what needs to be built is in emerging markets, where there’s much less financing than in richer countries. The imbalance is a big problem, because climate change doesn’t respect borders. Greening only wealthier countries won’t protect them from natural disasters arising from a warmer planet.

Understand the problem

Image of worker talking on radio sitting on solar panels

3. Building the net-zero world

Sources: UN Environment Programme; Global Infrastructure Hub; UN Office for Project Services

PwC indexed the extent to which 61 countries, representing 83% of the world’s CO emissions, are more or less attractive than others for private investment in green infrastructure, assigning a score to each for six core criteria. The scores reveal that the best opportunities may not be located where you expect.

A new PwC interactive reframes these key questions in the form of six underlying criteria, and allows you to explore how 61 countries stack up against them.

VIEW THE DATA

Challenge 3 Building the net-zero world

Challenge 2 Meeting steep net-zero commitments

Challenge 1 Adapting to climate perils

Challenge 3 Building the net-zero world

Challenge 2 Meeting steep net-zero commitments

Challenge 1 Adapting to climate perils

Challenge 3 Building the net-zero world

Challenge 2 Meeting steep net-zero commitments

Challenge 1 Adapting to climate perils

Performance above or below average in PwC index of green-financing opportunities

Unlikely metrics (“Got syrup?”)

The climate challenges highlighted in this issue—physical risk, Scope 3 emissions, and green infrastructure— remind us that measuring complicated things is hard. But we’ve found three unusual, and unusually reliable, indicators that remind us, it doesn’t have to be boring.

Waffles never sleep. That’s why when the US Federal Emergency Management Agency (FEMA) needed a no-nonsense damage assessment metric, they looked to Waffle House, the 24-hour US restaurant chain that’s famously hard to disrupt. As devised by former FEMA head Craig Fugate, a simple “stoplight” system spells it out:

The Waffle House Index

Image of waffle house sign with damage to letters

Red: Waffle House is closed. Deploy rescue teams; the area is hard-hit.

Green: Waffle House is open (with full menu). The surrounding area is doing OK.

Yellow: Waffle House is open (with limited menu). The surrounding area may need mass-care assistance (power is out, water is disrupted).

The late Alan Greenspan, US Federal Reserve chairman from 1987 to 2006, had a professional preoccupation with men’s underwear. Arguing that sales of the workaday garment should remain stable during good economic times, Greenspan looked for variations in underwear sales, seeing a decline as a sign of a dip in discretionary spending—and economic trouble ahead.

The Underwear Index

Purchasing power parity (PPP) assesses the strength of different currencies by comparing the prices of an identical “basket of goods,” which in turn allows for comparisons of productivity and standards of living between countries. The Economist created the BMI, in which the basket of goods for currency comparison is a Big Mac, that most universal of fast foods.

The Big Mac Index

More issues

Time to get serious about the realities of climate risk

Tackling the Scope 3 challenge

The Net Zero Economy Index

By breaking down big challenges into small ones, organizations can address climate change while finding business opportunities.

= climate opportunity

Climate challenge

This issue of strategy+business looks at three daunting climate challenges and highlights ways for companies to not only meet them but also spot unexpected opportunities.

Image of solar panels covered during a flood

Image of infrastructure designed walkway

Source: PwC analysis

November 2022

What are Scope 1, 2, and 3 emissions?

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Video transcript

The race to net zero can feel like a marathon, with plenty of hurdles along the way, as companies work to make meaningful change. But sometimes, it’s taking incremental steps that will get you where you need to go. One of those challenges is to better understand your company’s Scope 3 emissions. To track your Scope 3 emissions, you need to start by understanding what your footprint is. Once you do that, you may get some surprises. You may find that more of your emissions are in one part of your supply chain than you ever realized. It’s not enough just to know your Tier 1 suppliers or those most directly associated with you. You may need to go all the way back up your value chain to understand where your emissions really lie. And then you need to work out how you can take steps to work with your suppliers to take carbon out of the supply chain. And often that has a beneficial impact on your business as well, because taking carbon out can also take cost out. There are companies on this Scope 3 journey now who are taking real action. I sat down with Elisabeth Brinton, corporate vice president of sustainability at Microsoft, to talk about the issue. Emma Cox: Can you tell me a little bit about your ambition at Microsoft and how you’re seeking to tackle this? Elisabeth Brinton: Really, really focused on practicality. It starts with creating a baseline, understanding, and measuring. So Microsoft has been on a decade-long-plus journey with this. So, one of the first things we recognize in terms of Scope 3 are indirect emissions, starting with our supply chain, so the inputs coming in. So we worked on contracting and procurement. And it helps them, helps us, and then we can apply our technology. So we think of ourselves as “customer number one.” And then now, you know, looking at the larger value chain and including circularity, that's a bigger challenge. But it’s, again, it starts with data, tackling, creating a baseline, and then working a practical path forward. Emma Cox: Big ambitions. What do you think have been your biggest challenges so far? Elisabeth Brinton: The biggest challenges, I think, are just, it’s actually not behind us, but it’s in front of us. And so, I think the key thing is mindset, not being daunted. And so one of the things that is key to finding solutions is having a solution mindset, where you’re incorporating innovation and you see the opportunities around Scope 3 as a place of differentiation for your business model, innovation, opportunity, so it’s turning it around. And then, when you turn it around and are inspired, actually, that’s when the practical solutions begin to unfold because you’re bringing that inspired thinking as opposed to a fear-based mindset. And that to me is the future of sustainability. It’s not zero sum. It’s actually recognizing that this is a multiple bottom line and it’s great for business. Emma Cox: Tackling Scope 3 can’t be done alone. It’ll take ongoing conversation and collaborative action right across sectors and industries. And while it may feel complex, it’s also a powerful lever for business leaders looking to understand their impact and work together to decarbonize.

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Emma Cox, Global Climate Leader, Partner, PwC United Kingdom

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November 2022