Over the last couple of weeks, I have been closely watching with some surprise how the COVID-19 crisis overtook our daily lives. As of December, the virus was being discussed on the news, and in January and February, we were still joking about it. Then all a sudden in March panic started, emergency measures had to be taken at a short notice, and today we are still unable to see the impact these measures will eventually have. For me, the question that comes to mind is whether we are facing the same future on climate-related risks, or whether we will choose a better-prepared approach?
Climate risk has been on the agenda for years, with variable successes as to the attention it receives. However, something that is unquestionable is that climate change is happening, and we need to tackle this problem together. On the one hand by taking measures to limit climate change (mitigation measures), and on the other hand by taking measures to protect us for the changes caused by rising temperatures and sea-level rise (adaptation measures).
The approach used for tackling climate change is a topic currently on the political agenda, for which society is repeatedly demanding more attention. Another development over the last couple of years is visible in businesses. The topic of climate-related risks is increasingly discussed since investors, customers and auditors expect organizations to have insights in developing climate risks (as well as opportunities), its impact on their organization, and its impact on the vitality of the organization. On the one hand, this is driven by a financial perspective, but more often the sustainability perspective becomes visible as well, as this is becoming increasingly important for the reputation of the investors.
This growing attention is invigorated by recommendations of the Task Force for Climate change Financial Disclosures (TCFD). This taskforce is founded by the Financial Stability Board, which is chaired by Michael Bloomberg, and provides guidelines on how financial institutions should balance their financial impact as well as how to implement it in the governance and strategy of the organization. Additionally, the TCFD recommends that the balancing of climate-related risks and opportunities should connect to existing risk management methods. It should also use metrics and targets to ensure the possible impact on the organization is solid and substantiated.
Chairman Bloomberg of the TCFD indicates that, generally, transparency increases efficiency in markets, which in turn makes economies more stable and resilient. The task force focuses on transparency about climate-related risks and opportunities. Additionally, the Transparency Benchmark (TB), the initiative from the Dutch government to study transparency in (CSR) annual reports, announced that climate risk will be a prominent topic in their benchmark activities for the 2019 annual reports. Besides, increasing connections with climate risks are made by other, established, initiatives, like the EU Transparency Directive and the Carbon Disclosure Project (CDP). Climate adaptation is also picking up a prominent place in the EU Taxonomy. These developments, combined with the experiences gained by the COVID-19 outbreak, suggest that now is the time to get grip on this topic and secure in a sustainable way in how we manage risks in organizations.
But where do you start? With whom do you start? I will start with the latter question. Who in the organization should tackle this monster that has been discussed extensively already? For this topic, collaboration is of utmost importance. We are looking at initiating a collaboration between sustainability managers and risk managers. The former group has an interest in dealing with sustainability topics in a responsible manner, and the latter group wants to prevent the organization from having to deal with risks that were never picked up on the radar. Together, this duo can move the management to think about the topic of climate risks. Additionally, investor relations can help, as the importance of climate adaptation is becoming increasingly important for investors as well, for example, because of its addition to the EU Taxonomy.
What are we going to do? Climate change is studied on different levels and from different perspectives. Plenty of information is present about possible climate change scenarios. This initiating duo should research how these scenarios can be relevant for the organization, and what risks and opportunities this brings. The foundation of such an investigation is in current scientific data and scenarios. Especially the Intergovernmental Panel on Climate Change (IPCC) is publishing assessments of climate scenarios, future risks and possible impact. For involving these specified risks in the organization, the risk mainly depends on geographical location, the nature of operations and the product, raw materials, suppliers, disruption in the supply chain, customer base, and energy. Based on this first overview, management interest can be nourished.
After the initial scanning of the relevant scenarios, the insights on the actual connected risks and opportunities must be studied collaboratively. For example, if you look into the IPCC report and you read that the rivers in The Netherlands will be flooding more frequently and intensively, but you own a production facility on the floodplains of one of these rivers, what consequences would this bring along? And can any opportunities be identified?
Altogether, several scenarios and possibly relevant risks should be identified to find out whether a certain scenario could entail interesting opportunities for the organization. Thereafter, the attitude of the organization towards these risks and opportunities must be identified, as well as a prioritization of how these climate risks and opportunities are related to existing risks and opportunities. From an efficiency as well as a comparability perspective, it is useful to assess the risks and opportunities similarly in all risk categories. In other words, it is useful to use existing risk management methods for assessing climate-risks as well.
After identifying opportunities with this analysis, it is important to consider whether they should be integrated into the (sustainability) strategy. Doing this, climate-related risks are slowly embedded into existing governance and strategy structures of the organization, which is comparable to the integration process of other risk categories in the past.
Executing these steps provides insight and ideas about financial resilience, as well as the sustainability of the business model given climate change. This information is highly relevant for internal and external stakeholders. Therefore, it is valuable to adopt these lessons learned in reporting as well.
Climate change is requiring a thorough analysis from a risk management perspective. Having a clear overview of the risks concerning climate change helps to oversee impact on the strategy and possibly discover opportunities as well.
Sustainability consultancy Sustainalize and NARIS GRC Software combined forces and developed a database with possibly relevant risks for the main climate change scenarios identified by the IPCC. Additionally, an approach was developed for how organizations can conduct this analysis.
This database can be used as a starting point for our clients to do the first analysis of climate-related risks. Sustainalize and NARIS offer support during the execution of the different steps of the process. This includes accompaniment with analyzing the risks and opportunities, facilitating discussions and decision-making processes for implementing the outcomes of the analysis, and support for integrating the results in the (sustainability) strategy and current governance practices.
*Would you like to know more about this topic? On Thursday, May 14 at 10:00 am (CEST), Sustainalize organizes a webinar in collaboration with Naris: The importance of climate-related risks. Click here for more information.
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