Climate-related Risks: Start Small and Be a Learning Organisation


Climate-related risks: start small and be a learning organisation

Handling climate-related risks and opportunities

Climate change brings about risks and opportunities for all organisations. Understanding what they are and being able to quantify them is essential—not only for an organisation’s continuity, but also for external stakeholders, including investors and regulatory bodies. But where to start?

Rising temperatures, rising sea levels. Melting ice caps. Increasing numbers of droughts, heat waves, tropical storms, bushfires, floods. Even the most prominent climate sceptics can no longer deny it: our climate is changing.

This change has major consequences. For one thing, it can jeopardise production continuity. Can a brewery with factories in areas prone to drought continue producing? And then there are the responses to climate change. Regulators are changing carbon and energy regulations. Customers are becoming more critical of the climate impact of the products they buy while investors are increasingly more concerned how organisations manage their climate-related risks.

Organisations have to respond. They need to take measures now to minimise both their impact on climate change and the impact of climate change on their organisation. They must also be able to seize climate-related opportunities.

A Closer Look at Climate Change

Different types of climate risks and scenarios

We know that many organisations are struggling to do that. When we help them, our approach is to first differentiate between the various risks and subsequently identify these risks more precisely for each of the scenarios the Intergovernmental Panel on Climate Change (IPPC) describes.

There are three types of climate-related risks: physical risks, transitional risks and liability risks. Psychical risks might directly disrupt business activities as a consequence of, for example, floods or bushfires. Rising temperatures can lead to higher cooling costs in factories. Transitional risks arise from the switch to a low-carbon economy. Liability risks can be stakeholders who are seeking compensation for losses they may have suffered due to gross negligence.

The IPPC has identified four climate change scenarioss, all related to how much global temperatures may increase above pre-industrial levels: 4°C, 3°C, 2°C or 1.5°C. The last two are known as transition scenarios because they will only happen if net human-caused emissions of carbon dioxide (CO2) are drastically reduced

Quantifying climate risks

The next and probably hardest step is collecting the relevant internal and external data and understanding their interdependence to be able to quantify the risks—and opportunities. Organisations are experienced in collecting and reporting on financial data. However, they now have to collect other types of data, both internally and from their clients. That may include power use, water use, distances to forests or the sea — depending on the type of organisation. Organisations have to develop new processes to continually collect such data, and they have to set metrics and targets so they can address climate change based on facts.

Organisations that are struggling do not always have to re-invent the wheel. Many organisations are already using the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD). The TCFD recommends disclosures designed to get consistent, decision-useful and forward-looking information on the material financial impacts of climate-related risks and opportunities. Other external inspiration can be obtained from trade organisations or regulators that sometimes publish best practices or industry guidelines.

Just start

Although it’s hard, our advice is to just start. Begin small, focusing first on those risks with the highest impact on materiality, and adjust when you have new information or learn new quantifying methods. Be a learning organisation and be transparent about that in your reports. Quantifying climate-related risks will help you to address those risks effectively and to identify climate-related opportunities. Why wait? 

Read our full report A Closer Look at Climate change here

More information?

If you are interested in this topic and would like to have more information you can read our report A Closer Look at Climate Change. Do you have any questions or would like to discuss opportunities feel free to reach out to Harvey Christophers via the contact details below.

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