Climate resilience reporting needed in face of an uncertain future
Climate change remains a key risk for businesses. Yet to understand that risk in light of business impacts in the near- and long-term, there is a mismatch of quality risk modelling and reporting across the business environment. To create a standard for developing disclosures in the space for key stakeholders, the Financial Stability Board (FSB) – brainchild of Mark Carney and Michael Bloomberg – established the industry-led Task Force on Climate related Financial Disclosures. Implementing its recommendations across companies has so far been slow going.
Climate change is a material risk to the future of current forms of human development. A collapse of governance globally under extreme conditions, would be an unprecedented disaster, with little hope of reprieve. Mitigating risks that result in a meltdown of the global economy and governance is a key part of climate mitigation, whether through adaption of economies or reducing the harm being caused by polluting industries. While change for long-term sustainability is necessary in all scenarios going forward – the pace of change will determine the long-term costs, with a slower pace likely to see higher long-term costs.
The Paris Agreement sets out a clear target for climate warming of no more than 2.0C by 2100, with a strong preference for 1.5C. Getting there will require global efforts across the whole economy, from improvements to energy efficiency to shifts in generation. And while much of the world is beginning to make the kinds of changes necessary to stave off the worst of climate change – some of the world’s largest polluters continue to lag behind.
A new study from Oliver Wyman, titled ‘Reporting Climate Resilience: The Challenges Ahead’, looks at how companies are responding to the looming environmental risks to their businesses. The report examines how firms can be better environmental stewards, as well as how the environment could come to impact their operations. The authors note that “Climate change is exposing businesses to new and unpredictable strategic and operational risks; oftentimes, the physical manifestation of these risks can be catastrophic in nature and interfere with an organization’s ability to do business in the short, medium, and long term.”
As part of a shift in corporate culture to include longer term outlooks into their corporate responsibilities, the Financial Stability Board (FSB) – created by Mark Carney and Michael Bloomberg – established the industry-led Task Force on Climate related Financial Disclosures (TCFD) in 2017. The TCFD has broad support from NGOs, regulators, investor groups, the financial services sector, and companies across all industries.
The Oliver Wyman study shows that some of the world’s largest companies have signed up to the TCFD, with around $6.3 trillion in market capitalisation between them and $130 trillion in assets under management. Getting the reporting in line with what is needed remains a daunting task: so far, few companies have been able to fully integrate the TCFD recommendations on climate-related risk management and disclosures into their governance processes.
Fully implementing the TCFD requires considerable shifts across organisations in terms of processes within sustainability groups, company boards, their C-suites, senior management, and in risk management groups. Executive engagement and championship remain a key driver for success of TCFD implementation across companies. Shifting to third generation climate risk strategies is a key aspect of improving long-term business and social outcomes – including climate risk embedded in strategic assessment and operational planning.
As it stands, most firms are in the first- or second-generation level of climate resilience work: first generation firms continue to pay lip service, focused on reputation management, with low-level employee engagement activity and little movement to deep integration. Second generation actors are more aware that their businesses are causes of harm, as well as the impact historic harms are likely to have on their business. As such, they are introducing environmental risk management programmes with limited corporate management and strategy.
Shifting to better disclosure under the TCFD has three broad challenges, including governance and leadership, risk management processes, and scenario analysis. For governance and leadership, buy-in and championship from the top of the business is a key requirement. At board level, while risks are discussed, concrete actions tend to not be taken – with many boards focusing only on reputational risks rather than systematic ones. The executive meanwhile, too, face barriers – largely the result of ‘short-termism,’ which makes long-term focuses, such as company environmental damages, something to be avoided. Creating stronger incentives, such as bonus payment or performance payment, contingent on long-term environmental outcomes may create better outcomes. Currently, however, only 10% cite CSR as a condition whereby to set CEO pay.
Risk management is another key area in which TCFD recommendations need to be developed and deployed. Currently risk managers are too focused on short-term risks, while long-term ones, such as climate change, are ignored. Better collaboration between sustainability officers and risks managers will be needed to overcome the tragedy of the horizon, faced by businesses and the environment. This can then feed into business-wide implementations and discussion of key resilience needs, without leaving TCDF planning to siloed departments.
The firm also found that scenario planning is a key part of understanding the wider impacts of climate change on business decisions. Leveraging key data from a range of sources, from scientific conclusions to regional and sector specific carbon budgets, is needed to identify and develop more in-depth plans to integrate the risks into the wider risk reporting.
The authors conclude, “The real gain in disclosing climate-related risks is in the identification of new risk areas not typically captured under the lens of traditional risk assessments.”
