Why we need to prioritize climate change in business valuations

Jessica Fries

Jessica Fries, Executive Chairman of Accounting for Sustainability, on the importance of incorporating climate change risks into business valuations and why the industry must establish a unified approach



In recent years, climate change has been propelled to the forefront of business and investment decisions – and rightly so. There is no doubt that it represents one of the most pressing challenges that we face today. In addition to the devastating human impact, extreme weather and the physical risks resulting from global heating can prove fundamentally disruptive to businesses, and their assets, on both an operational and financial level, as can rapidly changing consumer demand for action and regulatory responses. It’s also clear that the transition to a net zero greenhouse gas emission economy presents extensive opportunities, and not paying attention could leave organizations behind.

If there is one thing that the past year has demonstrated, the biggest risk to the health of a business is often uncertainty. One thing, however, that remains certain is the threat posed to us by climate change. If we are to rise from the pandemic stronger and create a more resilient and sustainable future for ourselves, our economy and our planet, we need to allocate capital away from activities that generate negative impacts, and towards those that will have positive impacts – and we need to do so urgently. To achieve this, part of the solution must be the use of a robust approach to ensure that climate change risks and opportunities are effectively applied to business valuations and, therefore, decision making.

Climate change and business valuations are inextricably linked, affecting operational, investment and financial decisions. The process, however, of incorporating climate change into business and asset valuations is still in its infancy and as a result, there hasn’t been a consistent approach.

As we rebuild from this pandemic, it is clear to see that only by working together can we tackle climate change and effect real, lasting change. That’s why I’m proud to share that Accounting for Sustainability (A4S) has collaborated with CPA Canada, members of the Canadian Chapter of our CFO Leadership Network including large pension funds and asset managers, as well as valuation standard setters and experts, to develop a new publication – The A4S Essential Guide to Valuations and Climate Change.

The first-of-its-kind framework provides practice guidance for the finance community on how to incorporate climate-related risks and opportunities into business valuations, which we hope to see become an industry norm. Through the five-step framework, developed and tested by practitioners, the guide is helping to inform the discussion among the valuation, accounting and regulatory communities. By doing so, we would also expect more robust disclosures in corporate reporting and a greater oversight by boards on this topic.

By driving efforts to identify a robust and unified approach to evaluating climate risk and corporate responses, the investor and valuation communities can encourage integration into decision making. In turn, this can help pave the way for the foundations of a more sustainable future for the economy, society and the planet.

What’s more, climate change does not solely present a threat to society and our economy, it also brings with it the possibility of rapid transformation, innovation and opportunities for those developing solutions. Studies have indicated that companies that exhibit robust environmental, social and governance traits can benefit immensely – from outperforming their competitors and experiencing a lower cost of capital to minimizing share price volatility, as well as attracting and retaining talent more easily. Therefore, it is of vital importance that these benefits are factored into valuation methodologies, too.

As governments and businesses look to a green recovery, fulfilling ambitious net zero targets and prioritizing sustainable innovation, it is my hope that embedding these considerations into the valuation process will make it possible for this new framework to become the standard practice. We must take the initiative now to transform our financial systems, to build for the long term and to set ourselves up for the future. Only by doing this and adopting more resilient business models can we drive forward a sustainable economy – one where sustainable decision making is business as usual.

“If there is one thing that the past year has demonstrated, the biggest risk to the health of a business is often uncertainty. One thing, however, that remains certain is the threat posed to us by climate change.”

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