Climate and Climate-Related Risk in the Retail Industry

The Intergovernmental Panel on Climate Change (IPCC) defines climate risk as the potential negative impacts of climate change on an organization or an entity. It includes the potential for adverse effects on lives, livelihoods, health status, economic, social and cultural assets, services (including environmental) and infrastructure due to climate change. The importance of assessing and tracking climate risks is significant. A New York Times article from April 2021 stated that climate change could shave 11-14 percent from global economic output by 2050. The potential economic ramifications of climate risk will impact nearly every sector and the investment community will need to track and account for the risks associated with climate-related events when determining how and where to place investment dollars.

Climate-related risks can be divided into two categories: physical risks, which are economic losses related to the impacts of the changing climate; and transition risks, which are risks related to the process of adjusting to a low-carbon economy. Physical risk can be further divided between acute risks, which are event-driven such as increased severity of extreme weather events, and chronic risks, associated with longer-term shifts in climate patterns.

Impact on retail

The retail industry faces a variety of both physical and transition risks. First and foremost, changing weather patterns and the increasing frequency and severity of severe weather events will continue to disrupt global supply chains and distribution. That leads to risks that can impact corporate performance, limit availability and impact pricing for key products and services, disrupt business continuity and endanger employees. Retailers that do nothing to address these risks can potentially face significant losses.

Transition risks to the retail industry are related to shifting policies, business operations and consumer behaviors. ESG reporting requirements will pose risks to companies that don’t comply, as will changing regulations and changing consumer preferences for products they view as sustainable and ethically manufactured. As retailers work to meet these shifting demands, they can face higher costs for materials, equipment, data verification and more.

What can be done?

Retailers are addressing the impact they have on the global environment. The combination of distribution requirements, raw material needs and the disposability of consumer products combined with changing consumer attitudes around sustainable purchasing has led some retailers to take action.

To combat these impacts and reduce climate risks, retailers are accounting for and reducing their environmental footprint. This includes tracking their Scope 1, 2 and 3 carbon emissions.

To learn more about retailer efforts to tackle climate change, see the NRF Retailers Reaching for Net-zero guidance.

Recent Headlines

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• Fashion United: Retailers to face more disruptions due to climate change