Taking Climate into Account: Managing Climate Risk
Read the full article at Financial Director.
Paul Simpson of CDP highlights the importance for companies to include climate risk in their risk management processes, as Mark Carney and Michael Bloomberg’s climate task force prepares to report to the G20 in July.
Last year was the hottest on record. Even though climate change is generally seen as a long-term issue, it is already radically re-shaping many businesses, especially when it comes to risk management. For example, climate-related events such as Hurricane Sandy and the recent Californian drought have reshaped sectors like insurance and farming in the affected areas, causing massive financial losses. Increasingly, all organisations are expected to consider the complex set of climate risks and opportunities that might affect their business from a ROI, brand reputation and regulatory perspective.
One of the most important developments for CFOs in this area may prove to be the Task Force on Climate-related Financial Disclosures (TCFD), led by Mark Carney and Michael Bloomberg, which this July will set out a suggested framework for companies to report how they are managing climate risk. Businesses are now expected to disclose climate risk management.
Under “risk management”, the TCFD suggests that companies disclose: “How the organisation identifies, assesses and manages climate-related risks”. In practice, the TCFD elaborate that this means that in the coming years CFOs and their companies will be expected to publicly describe:
- The organisation’s processes for identifying and assessing climate-related risks;
- The organisation’s processes for managing climate-related risks;
- How processes for identifying, assessing and managing climate-related risks are integrated into the organisation’s overall risk management.
The good news for risk management teams is that the tools and processes required to help CFOs are already widely available. Two good examples are internal carbon prices and science-based targets.
Climate is already a fundamental part of the risk management process for many companies and it will soon be seen as a major oversight to exclude such considerations from the process. Companies that fail to include climate risk in their planning are likely to find themselves under pressure from shareholders, investors and consumers once the TCFD recommendations are handed to the G20 this summer.