According to recent data from Bloomberg, the majority of senior executives (85%) indicated that their firms have started assessing climate risk. However, of that group, 37% are in the early stages of planning how to incorporate climate risk into their models, and 43% are in the mid-stage of incorporating climate into risk management and governance analysis based on measures like carbon emissions.
With the majority of organisations in less mature stages of their climate initiatives and risk frameworks, more attention and education efforts must be given to this issue. In fact, only 19% of surveyed companies are using digital technology to help understand climate change risks.
Even for organisations with more advanced models, it’s critical that changes are continuously implemented as our knowledge of climate risk evolves.
SGV spoke to Rick Dorsett, Senior Director HRAVS & ESG at ISN about the implications of climate risk for business today, and how companies can most effectively engage.
What is your advice for those companies who are starting on the climate risk journey?
Most organisations start their climate risk journey for a combination of reasons, whether it be investor motivation, reputational purposes or a mission to move their business in a more sustainable direction.
The majority of organisations are beginning for at least one of the above reasons, and it’s recommended to start with a “walk before you run” approach. Establishing a baseline of where your company is in the journey is an important step to start.
By identifying where your organisation is most vulnerable to climate risk and identifying risks through the supply chain, companies can properly educate their stakeholders and gain a better understanding of the direction they should be heading for the rest of their journey.
Is there a list of steps you should take to identify what climate risk means for your business?
To identify what climate risk a company has, they should identify what specific areas of their business could potentially be affected. This can relate to the physical risk associated with a company, or the operational risk of their business. Ultimately, climate risk looks different for every business.
When considering physical risk, companies should identify what assets could be physically impacted by the changing climate and how the climate affects business activities both financially and operationally.
As an example, if extreme weather led to more natural disasters in your area of operations, would your facilities be able to withstand these impacts?
What do you understand by climate risk?
When discussing climate risk, financial materiality and double materiality are not mutually exclusive, as it can be both or either one.
It considers how increases in temperature impact business operations, and also how a company’s operations and transition to renewable energy could impact the surrounding environment.
Once you’ve decided what’s material, how do you identify relevant metrics?
Once an organisation has decided what is material, a good start is to first review what other companies in their industry are reporting on, what frameworks are being used, and what disclosure topics they report on.
By leveraging public-facing sustainability reports from peer companies, organisations can get a good idea on relevant metrics to report on.
Once baselines are identified, organisations can then set targets. This not only helps organisations track progress, but also identify potential obstacles that may keep your company from achieving its end goal.
How do you decide which climate risk framework to use?
There is no “one-size-fits-all” climate risk framework. As mentioned earlier, organisations have different motivators, including investors, clients, or other external stakeholders. Each one of these groups may have a preference on a specific framework.
In determining which framework makes sense for you, first consider materiality, physical and operational risk and goals, then consult with your organisation’s key stakeholders to make a group decision.
Also, it is not a requirement that you leverage just one framework. If it’s beneficial or necessary, your organization can incorporate more than one.
Is measurement of GHG emissions alone going to be enough to understand your risk profile?
No, there are many other environmental metrics that should also be considered based on what industry the company operates in.
Examples could include what percent of your company’s operations are in high-water stress regions, how many facilities are in 100-year flood zones, and how rising temperatures may impact the energy demand and energy intensity within your operations.
How do you best collect and analyse relevant data?
Companies should identify what is material and begin by setting a baseline level from which all data will be compared to over time.
Companies can then analyse trends indicating the progress of the organisation towards their material goals. Implementing technology will aid in the collection, tracking and analysis of data and reduce administrative burden.
How do you embed climate risk into risk management frameworks?
Considering climate risk should be an essential part of a company’s risk management framework, from deciding where to open a new location or determining which materials are sourced for a new product.
Companies should also reference ISO 14000 for guidelines on developing an environmental management system.
How do you avoid being accused of greenwash as you’re preparing to understand risks?
Organisations should only publish information from sources with solid data to support it and consider the context in which the data is being presented from the audience’s perspective.
For most corporations, the real problem is not greenwashing, but a lack of true understanding on how to report ESG and climate-related metrics. Organisations can start by educating internal stakeholders, setting a baseline, having auditable data that is accurate and consistent, and reporting accurately on the same data sets and baselines.