Environmental

Discussion about the Environmental, Social and Governance Risks to the Business posed by the Climate Change

The key focus area of this study is to analyze the different risks related to different areas such as environmental, social, and governance within the business and these risks are posed by climate change in a particular country.

This study has a greater scope for future readers as this provides the details in regards to the several risks to the business which has to face these issues due to the climate changes without the particular country (Carney, 2015).

In concern of different issues related to climate changes in the different areas such as environment, social and the governance etc. are very common for the businesses as while operating their businesses climate changes create the major impact over the businesses and most of the time, these changes have a negative impact on the business.

In concern of the climate changes, it is mentioned that the climate changes are important factors for any business as while operating the business in any country, it is important for the businesses to consider the factors of the climate changes and manage their production processes as per the impact of climate changes.

It is done by the businesses to manage their productions and reduces the losses which have been bearing by the businesses due to the climate changes in the country (Rickards et al., 2014).

These climate changes are considered very critical for businesses as due to climate change, businesses can have environmental, social and governance risks which are very difficult to be addressed within the businesses. In addition, climate change is not only an environmental problem but also for everyone’s problem which exists in this world.

In respect of the climate changes, it is also mentioned that these changes can be in different forms as it includes increased heat, drought outbreaks, declining the water supplies, health impact due to climate changes, reduced agriculture yield, flooding erosion within the coastal areas and so on (Forino et al., 2015).

Above defined climate changes create their impact in different ways or it can be said as the risks including environmental risk, social risks, and governance risks etc. These various risks impact businesses in different ways. In concern of the environmental risks, it is defined as the risks which have from the environment due to climate changes (Camilleri, 2015).

It includes extreme weather, resource unavailability, floods, water crisis, and hurricanes along with earthquakes etc.  These all the environmental risks are determined due to climate changes and these risks impact the businesses very deeply.

Due to these environmental risks, businesses have to bear increased insurance costs, damage to resources and the official property, and the disruption of the water as well as power etc. In this situation, the costs of the business product increases and the profit of the businesses get affected at the extended level.

At the same time, it is also reflected that climate change also arises the social risks for the businesses because of the climate changes, businesses have to face the social risks which are not good enough for the businesses.

This condition of social risks impacts the business’s brand image and reputation within the target market in a negative manner. In the context of social risks due to climate changes, some critical issues are included which are labor issues, human rights violation and the misuse of natural resources etc (Wright and Nyberg, 2017).

The situation of social risks takes place within the businesses because of climate changes which pressurize the businesses to adopt some practices and conducts some actions which lead the social risks for the businesses.

In a similar concern, it is also disclosed that the social risks for the businesses involve the actions of the businesses which negatively affect the communities around the businesses.

Apart from the above, the climate changes also affect the businesses by arising the governance risks for them as climate changes also lead the governance risks for the businesses.

In this, the governance risks for the businesses include risks associated with the overall system of the rules, standards and the business practices which are done to direct the businesses. However, it is quite difficult to link the governance risks with the climate changes but it has been seen most of the time that the climate changes somehow have its impact on the business governance (Wright and Nyberg, 2015).

In this way, the harsher working conditions, changing regulations, and changing business practices etc are included in the governance risk for the businesses. Because of these governance risks, the organizational processes get hindered at the extended level as these governance risks majorly impact the business processes, practices, their rules and regulations that cannot be bear by the businesses for the long time duration.

In concern of the above mentioned all the risks due to climate changes, the businesses have to face several problems in terms of decreased profitability, unavailability of resources, improper business operations and so on. In this manner, it is well known by the businesses that climate changes can be stopped so it would be better for the businesses to adopt some important strategies which are beneficial for the businesses to deal with these climate changes (Barnett et al., 2015).

In this concern, several climate change strategies are determined that can be adopted by the businesses while producing the products and operating their business operations in a more effective manner. At the same time, it is also mentioned that different businesses have different climate change strategy which is beneficial for businesses to manage the impacts of climate change over the businesses.

With the help of these climate change strategies, businesses are capable to reduce the impact of climate changes in terms of environment, social and governance of the business.

In this way, the key goal of the adoption of the climate change strategy is to enhance the resilience of the society in regard to the climate change. In addition, this climate change framework is effective to manage the future climate risks including the environmental, social and governance risks to the business posed by climate change. It is also effective to prioritize and coordinate the business actions at a significant level (Camilleri, 2015).

At the end of this study, it can be concluded that climate change has an impact on the business in terms of various risks such as environmental, social and governance risks to the business.

In a similar manner, all the risks have a different impact on the business. In short, these risks impact the business’s operations in different manners in their specific areas including environment, social and governance etc. In this concern, several climate change strategies are determined that can be adopted by the businesses while producing the products and operating their business operations in a more effective manner.

Critically review how the overwhelming dominance of the US dollar in cross-border trade transactions creates: i) unappreciated vulnerabilities for the real economy and ii) complications for policy in both the US and around the world.

The International trade is dominated by the presence of US dollars more so for economies which are developing as compared to countries which are highly industrialized and invoice higher percentage of exports in their own currencies. This happens in case of international debt as well.

Time and again many countries have tried to challenge the dominance of US Dollars but most such attempts have failed in the past. However, a country like China has attempted to challenge this dominance through Renminbi which has a growing recognition in the International Monetary Fund as well. This point only illustrates the importance of bringing in a international monetary reform which is the need of the hour.

This dominance of the US Dollar on the cross border trade has only put a lot of pressure on the sovereignty of developing countries.

Here we need to understand the fact that the monetary relations are mostly asymmetric in nature as only a few currencies are being used in the global trade, especially US Dollars. The conclusion is that the country dominating the currency which is being used worldwide has only gain while the countries of the developing world mainly are put under severe constraint.

There are two major factors illustrating the anomaly, mainly international debt issuance and invoicing of international trade. (Grassman, 1972), had undertaken an empirical study which helped to identify the main pattern through which the international invoicing was done. This provided some groundbreaking insights into the above process.

Another important point already mentioned above that is International debt issuance has also been a subject of many a researches and one of the most pioneering on the same subject was the research done by (Eichengreen, Hausmann and Panizza 2002). Also as per the study undertaken by (Cohen, 2000) most of the developing countries go for the top international currency for their international debt and cross border trade.

As a result the US Dollar has gained strength since the past few decades. For many developing countries this has been a difficult time as they attempt time and again to define international debt and international trade in their own currency.

The International trade as we already mentioned is dominated by the top currency always and this results in vulnerabilities in the economic scenario. In 1968, Sven Grassman illustrated the fact that an exchange involving developed or highly industrialized countries will result in a symmetric relationship.

He refuted the idea of US Dollar dominance however the same conclusion does not hold good for today’s economic scenario, especially in the case of developing countries. As pointed out by (Tavlas, 1991), the US Dollar is the only form of exchange used in international trade by developing countries.

Dominance of the Dollar in international trade has only grown stronger and has not moved an inch towards rebalancing in favour of the currencies of the developing countries. As per (Kamps, 2006), a lot of industrialized countries have been able to invoice in their own currencies.

However, one point to be considered here is that in spite of the attempts of the developed countries, there are a few countries, where the US Dollar has been steadily gaining ground such as France, where the share of US Dollar rose from 9% in 1974 to 18.6% in 1995 and in 2012 it reached to 38.5%.

In Australia as well, almost three quarters of the exports were invoiced in US Dollars and even New Zealand also mostly exports in the above currency (Fabling and Sanderson, 2015).

As per developing countries, US dollar has maintained a very strong position as per data gathered by (Lai and Yu, 2014). The US Dollar accounts for almost 80% of the trade in both Asia as well as in many Latin American countries. The financial structure of these countries are already pretty vulnerable as firstly their currencies cannot be converted as also their export scenarios are predominantly dealing with primary products.

The issue of the national currency which is non-convertible results in a major drawback for all developing countries as it results in restricted access to the national currency which in turn does not help the international trade. The above restrictions are however very important as they help to maintain stability especially in countries where the financial systems are as yet immature(McKinnon and Schnabl 2014).

As we have already inferred that the developing countries are specialized in the primary products it also implies that competition is mainly driven by the prices alone. As per (UNCTAD, 2014), it is generally seen that the commodity prices are in fact much more volatile when pitted against manufactured goods.

It is obvious that in such circumstances, the producers are left with no choice but resorting to hedging of instruments. What they then need is financial services in which the best are available in international currencies wherein the US Dollar tops. The use of the hedging instrument is that provides a kind of insurance that buyers and sellers need in order to go for international trade.

This results in the various entities from developing countries being pushed into the adoption of the US Dollar standard. Another point to be noted here is that a large number of the international firms are from developed countries and hence they do their invoicing in their own currency which is mainly US Dollar.

The increase in global trade has not resulted in the diversification of the monetary practices at all. In fact although new players are increasingly being added to the global game, they are ending up adopting the existing monetary policies.

We have seen in the past that any attempts at promotion of US Dollars have not been successful at all. In fact such failure is evident in the case of Iraq, when before his overthrow, Saddam Hussein began the invoicing of Iraqi oil in Euros or we could also consider the case of Iran wherein usage of non-dollar currency has only created difficulties.

Venezuela has tried to challenge the existence of US Dollar in Latin America. In developing countries, the standardization of the US Dollars has resulted in a very tangible hurdle and it makes the cost of operation way higher for the players involved.

Also the foreign exchange fluctuations are a major point of concern resulting in real time constraints on revenue forecasts as well as the pricing. In fact the developed countries have also miserably failed in this regard time and again. The Deutsche mark, the yen and euro have tried and failed to replace Dollar from the position of number one currency of trade(Faudot and Ponsot, 2016).

The continuous dominance of the US Dollar in the international trade out of the 151 currencies of the world has many repercussions on the economic policies of the world as well. Any change negative can result in a spillover of large proportions in the global economy.

The simple logic here is that a country that has borrowed in US Dollars would issue the debt or take out the loan also in US Dollars which also means that they are paying much more in their own domestic currency.

This results in a lot of pressure on the corporate balance sheets and in fact result in the devaluation of the firm. The spillover effect is that the firm would not be in a condition to borrow soon again and that would also affect its production, hiring and investment adversely.

Overall the growth of the country shall be affected. The US Dollar dominance can result in complete dependence of the countries of the world on the currency and any change can not only affect the US Policy but the world policy as well as the recession of 2007-2009 indicates.

References

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Camilleri, M.A., 2015. Environmental, social and governance disclosures in Europe. Sustainability Accounting, Management and Policy Journal.

Wright, C. and Nyberg, D., 2017. An inconvenient truth: How organizations translate climate change into business as usual. Academy of Management Journal60(5), pp.1633-1661.

Wright, C. and Nyberg, D., 2015. Climate change, capitalism, and corporations. Cambridge University Press.

Barnett, J., Evans, L.S., Gross, C., Kiem, A.S., Kingsford, R.T., Palutikof, J.P., Pickering, C.M. and Smithers, S.G., 2015. From barriers to limits to climate change adaptation: path dependency and the speed of change. Ecology and Society20(3).

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Tavlas, G.S., 1993. The ‘new’theory of optimum currency areas. World Economy16(6), pp.663-685.

Kamps, C., 2006. New estimates of government net capital stocks for 22 OECD countries, 1960–2001. IMF staff papers53(1), pp.120-150.

Fabling, R. and Sanderson, L., 2015. Export Performance, Invoice Currency and Heterogeneous Exchange Rate Pass‐through. The World Economy38(2), pp.315-339.

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McKinnon, R. and Schnabl, G., 2014. China’s exchange rate and financial repression: The conflicted emergence of the RMB as an international currency. China & World Economy22(3), pp.1-35.

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Faudot, A. and Ponsot, J.F., 2016. The Dollar dominance: recent episode of trade invoicing and debt issuance. Journal of Economic Integration, pp.41-64.

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