Firms must warm up to climate change transition
Claire Massie, Pinsent Masons Head of Banking & Restructuring in Scotland
Climate change will require businesses in all sectors to reassess and change their operating model as part of the transition to a cleaner world.
Many businesses will not be financially robust enough to survive the challenges posed by climate change without undergoing some form of restructuring but those which address the impact – and increased regulation – head on, making use where necessary of the corporate and insolvency tools available to them, will be best-placed to succeed.
A scheme of arrangement, a voluntary arrangement or a new restructuring plan, can be used to restructure a company’s balance sheet and introduce new finance and investment alongside an operational restructure. A pre-pack administration may also be an effective mechanism to rescue those parts of the business that are capable of adapting to climate change.
Climate change may create physical risk to a business’s assets, supply chain and operations. Physical risk refers to climate-related adverse trends and severe weather, for example raised sea levels, floods, storms, droughts and wildfires. Physical risk can damage or destroy property and impact the value of assets and the ability to obtain insurance, all of which can leave a business in financial difficulty.
In the move to a greener economy, businesses also need to consider whether “transition risk” will have an adverse effect. For many businesses the transition will require significant financing and large-scale investments and some sectors will face bigger challenges than others – energy companies, manufacturers of raw materials and those in the automotive and aviation industries are the most obvious candidates.
Also, businesses need to consider the potential liability to third parties seeking to recover losses they may have suffered because of the physical or transition risk of climate change, and the impact on all stakeholders, including their supply chain and customers. It is also likely that there will be changing consumer trends towards more sustainable products.
Those businesses that are slow to enact climate control measures may find it increasingly difficult or expensive to obtain funding and investment as their assets devalue, risk profile increases, credit rating is downgraded, and business models become less viable from a sustainability perspective.
Lenders and investors are becoming less willing to support businesses which do not have long-term strategies to achieve environmental sustainability and banks are already moving towards aligning themselves with more sustainable businesses. Former Bank of England governor Mark Carney has warned that companies and industries not moving towards zero-carbon emissions may lose investor confidence and risk bankruptcy. Firms that are part of the solution will do very well during this process, he said, but there would also be ones that lag behind “and they will be punished”.
A business that cannot obtain funding or investment will fail. A number of green and sustainability linked financing products and government support is available to support businesses that are dedicated to making a change and to fund new projects. Businesses will need to ensure that any changes are real – lenders and investors will increasingly seek independent verification that businesses are making genuine changes and are not just “greenwashing”.