Climate change as business Risk
Numerous surveys have shown that the majority of enties, both large and small, are still not far-sighted enough to take the assessment of climate-related risks seriously. There are exceptions of course, in industries such as insurance and to a lesser extent the utilities and public sectors, but climate change risk assessment is mainly confined to their back-burner.
The impact of climate on the business operation is significant. The proactive assessment can get huge operational benefits to the entities specially in the areas of supply chain, operations or investment portfolio. There is also increasing pressure from shareholders for firms to get a handle on their climate risk profile. Investors backing projects that could take several decades to deliver a return, want to know how their investment will be impacted by anticipated changes in rainfall patterns, sea levels and extreme weather risks, not to mention potential changes in legislation and consumer behaviour. As a result, growing numbers of investors, are lobbying for businesses to include details of climate risks in annual reports.
Significantly, these investors recently secured the backing of the Securities and Exchange Commission (SEC) when in January it issued guidance to entities on how to report their exposure to climate change in their financial filings. The SEC highlighted four areas where climate related disclosures may be required: physical impacts of climate change; impact of legislation and regulation; impact of international accords; and the indirect consequences of regulation or business trends.
That broad template gives all entities a good outline of what they should be looking for when undertaking climate risk assessments. However, the SEC provided little information on how best to undertake such an assessment and ensure that risks are adequately accounted for.
The first step all entities should undertake is to check whether they need to carry out a detailed climate risks assessment. It could be argued that every entity will be impacted by climate change and should be aware of the risks. However, some entities are more vulnerable than others and it is these high-risk operations that should invest more in working out their risk profile.
As a first step firm should determine whether or not a risk assessment is necessary to identify further actions.
It is recommended that simple early screening should answer three important questions: is climate important to business risk? Is there an immediate threat or are long-term assets, investments, or decisions being locked into place? Is a high value at stake if a wrong decision is made? If a business answers yes to one or more of the questions then it is likely to be in the businesses interest to undertake a more comprehensive assessment of climate risks.
The list includes a number of questions relating to risk: what are the operational impacts of climate change on the entity? Which of the entity’s key operating assets are located in areas vulnerable to climate change impacts and what are the implications? How sensitive is demand for products and services to climate change impacts? How could current and future climate change regulations and industry standards affect the entity and its reputation?
How climate change can also create new opportunity: what new and enhanced existing products and services entity can offer to customers? What operational benefits the entity can enjoy from managing the response to climate change?
Finally, analyse the entity’s response: how clear and effective are the entity’s internal management responsibilities for climate change and their engagement with stakeholders? How well the entity is structured for managing climate change? How can the entity ensure the approach is based on robust information and assumptions? How can the entity demonstrate that it’s climate business resilience plans are realistic and financially viable?
If all these questions are answered by the entity accurately and comprehensively, it will end up with a pretty robust climate risk assessment.
Comprehensive climate risks assessments are likely to require plenty of work and, the Big Four accountancy firms have joined specialist consultancies such as Acclimatise and Maplecroft in developing services to help firms navigate their way through the task.
However, regardless of whether businesses turn to a consultancy or undertake the assessment themselves, more and more firms are going to face pressure from investors and suppliers to provide evidence that they understand and appreciate the climate risks they face. In addition, those that undertake successful risk assessments will find themselves in a stronger position for having identified those vulnerable areas of the business that could suffer as a result of climate change.