From food and water to clothing to transportation, housing, and weather events, climate change has the power to impact every facet of your life. Business is no exception.
A 2023 survey from the Edelman Trust Institute reports that 93 percent of global respondents believe climate change poses a serious and imminent threat to the planet. Yet, only 49 percent trust businesses to “do what’s right” regarding climate change, trailing behind trust ratings for governments and nongovernmental organizations (NGOs).
“Climate change is one of the world’s biggest societal challenges,” says Harvard Business School Professor Forest Reinhardt, who teaches the online course Business and Climate Change alongside HBS Professor Michael Toffel. “Companies will have to play an active role if we, as a society, are to have any realistic hope of managing the challenges presented by climate change.”
As a business leader, it’s crucial to craft a climate-informed organizational strategy to adapt to the changing world and help mitigate climate change’s harmful effects. Before diving in, here’s a breakdown of climate change basics.
Related: Listen to Professor Reinhardt discuss climate change and the tragedy of the commons on The Parlor Room podcast, or watch the episode on YouTube.
What Is Climate Change?
Climate change refers to long-term shifts in temperature and weather patterns. Although some changes in Earth’s climate are natural, most are anthropogenic—or caused by humans.
“Scientists agree that human activity is now the leading cause of climate change and is why the planet is warming up much faster than it ever has in the past,” Toffel says in Business and Climate Change. “Anthropogenic climate change began when humans started cutting down forests to clear land for agriculture and other forms of development—building cities, paving roads, and burning fossil fuels for energy, among other activities.”
Those activities disrupt Earth’s natural regulatory systems—namely, the greenhouse effect, carbon cycle, and water cycle—by emitting more greenhouse gas into the atmosphere than can be naturally absorbed.
“When we add greenhouse gases to the atmosphere, we perturb the balance,” says Harvard Professor of Geology, Environmental Sciences, and Engineering Dan Schrag, who’s featured in Business and Climate Change. “What happens is, greenhouse gases accumulate in the atmosphere and absorb some of the infrared radiation that’s trying to escape to space and reradiate that heat back to the surface. Essentially, to re-achieve an energy balance requires the temperature of the Earth to increase so that it’s emitting more infrared radiation back to space. That’s what the Earth is trying to do now. We’ve added carbon dioxide to the atmosphere, and the Earth is trying to heat up to achieve a new energy equilibrium.”
In addition to higher average global temperatures, climate change’s effects include extreme weather events, like storms, heat waves, temperature fluctuations, and rising sea levels, which cause flooding.
Related: Understanding the Basics of Climate Change
How Do Businesses Contribute to Climate Change?
Businesses are some of the largest greenhouse gas producers, making them major contributors to climate change. In 2022, U.S. businesses produced more than six billion metric tons of carbon dioxide equivalent, the metric by which greenhouse gas emissions are commonly measured because it allows different greenhouse gases to aggregate.
There are four naturally occurring greenhouse gases:
- Carbon dioxide (CO2)
- Methane (CH4)
- Nitrous oxide (N2O)
- Water vapor (H2O)2
Humans have also created a new greenhouse gas called fluorinated gas. Carbon dioxide equivalent encompasses all these greenhouse gas emissions.
Businesses can generate excess greenhouse gasses by:
- Burning fossil fuels to generate electricity
- Producing cement, steel, and iron for construction
- Waste management, such as landfills and trash incinerators
- Transportation, including cars, trucks, planes, trains, and ships
- Clearing land for agriculture
- Raising livestock
- Industrial processes like refrigeration and air conditioning
Climate change is an externality of these processes.
“An externality is a side effect of the production or consumption of a product or service,” Toffel explains in Business and Climate Change. “This side effect—which is typically referred to as a ‘cost’ in economics—is borne by some part of society that is neither the seller nor the buyer of the product or service.”
Externalities can be positive or negative. One example of a negative externality used in Business and Climate Change is a steel factory excreting wastewater into a nearby river, causing fish to die. Those who fish in the river bear the burden of this cost—not the steel company or its customers.
The greenhouse gases your product’s sourcing, manufacturing, and transportation generate likely cause negative externalities, too. By understanding how businesses contribute to climate change, you can shape your organization’s strategy to prepare for and reduce its effects.
How Climate Change Shapes Business Strategy
There are two lenses through which climate change impacts business strategy: adaptation and mitigation.
According to Business and Climate Change, adaptation refers to the actions companies take to respond to, prepare for, and build resilience against climate change’s physical effects.
Equally important is mitigation, which refers to companies’ actions to limit climate change, such as by reducing greenhouse gas emissions or removing them from the atmosphere.
“In the past, there were concerns that any discussion about adaptation would remove focus and urgency from the topic of mitigation,” Toffel says in the course. “This is no longer the prevailing view. There’s a growing understanding of the importance of both adaptation and mitigation.”
He goes on to describe the interconnected relationship between the two concepts.
“More mitigation will temper the severity of climate stressors and reduce the amount of adaptation that will be needed,” he says.
To assess your business strategy through both lenses, here are three considerations.
1. Conduct a Life Cycle Assessment
One way to determine how your strategy might change to reduce emissions and adapt to existing climate change effects is by conducting a life cycle assessment of your product.
The five stages of a product’s life cycle are:
- Sourcing: Where do the raw materials come from?
- Manufacturing: What processes do you use to make the product?
- Distribution: How do you disseminate the product to retailers and end users?
- Use: What’s involved in the processes of using the product?
- End-of-life: What happens to the product when it’s done being used?
For each stage, consider:
- Which greenhouse gases are emitted?
- How much greenhouse gas is emitted?
- What resources are necessary at this stage? Does climate change impact them?
- Are there any negative externalities associated with this stage?
Just like fishers inadvertently paid the cost of the steel company’s actions in the aforementioned example, consider who pays for your company’s climate change contributions at each product life stage.
2. Practice Carbon Accounting
The process of calculating the amount of carbon dioxide equivalent your business produces is called carbon accounting. By identifying and measuring it at each stage of your product’s life cycle—plus any emissions from general operating activities—you can gauge your business’s impact on climate change.
Once you’ve calculated your emissions, integrate a plan for carbon neutrality into your business strategy. Carbon neutrality is the balance between carbon emission and removal. One way to pursue it is by paying another company to remove a specific amount of carbon dioxide, called a carbon credit, from the atmosphere on your behalf.
Removal methods include planting trees and direct air capture (DAC), a new technological process that separates carbon dioxide from the air and stores it underground.
When keeping track of carbon emissions, carbon credits cancel out the specified amount of carbon emissions—helping you toward your carbon neutrality goal.
3. Leverage Opportunities for Innovation
While much of your strategy should focus on climate change’s risks, consider opportunities for creativity and innovation. If you identify critical resources in your product’s life cycle that climate change can impact, it’s in your best interest to research alternatives.
For example, if you sell jam, your key resources include fresh produce. Climate change can affect crop viability through extreme heat, drought, or weather events. Perhaps your strategy is to open a second line of business selling honey. Keeping bees can contribute to the pollination of your crops and provide a second stream of income.
Because climate change is such a pressing global issue, there’s a need for new innovations to help mitigate it. Consider creating an innovation lab within your organization to foster creative product ideas that can positively impact climate change.
Gaining the Knowledge to Lead Positive Change
Climate change can feel daunting if you’ve never incorporated it into your business strategy. Taking an online course like Business and Climate Change can be an effective way to gain the foundation and insights to approach it.
Not only can you leverage the scientific fundamentals necessary for understanding and communicating about climate change but learn from real-world business leaders who’ve addressed climate change’s risks and opportunities firsthand.
“It may be easy for managers to fall into the trap of thinking that one business’s impact isn’t big enough to be worth doing or taking the perspective that it’s someone else’s responsibility to act—the government should take care of it, or consumers need to drive demand,” Reinhardt says in Business and Climate Change. “But the lesson all business leaders can take from this course is that every firm can have an impact.”
Do you want to learn more about adapting to and mitigating climate change? Explore Business and Climate Change—one of our online business in society courses—and download our free e-book on how to become a purpose-driven, global business professional.
