Addressing the material risk of climate change in your company
The business risks posed by climate change and extreme weather have become more frequent and more apparent. Severe weather events have become a significant concern for operations, asset managers and their key internal as well as external stakeholders. Climate risk is material to every company that has customers, investors and employees.
Business leaders surveyed by the World Economic Forum say the top three risks they face are extreme weather, migration caused by climate change and natural disasters. This amplifies the call for a new level of climate-risk transparency to company assets. Companies around the world are feeling climate-change concerns, from the vulnerability of international supplier and logistics providers to out-of-the-ordinary weather disruption and extreme temperatures. Sites are also at risk for wildfire, coastal flooding and lack of clean water for operations. Additionally, customers are voicing their concerns about the risk of climate change and extreme weather.
How a company responds to these concerns has become central to stakeholder understanding of climate-related risk to companies. Is your company at material risk? Do you know for sure?
Climate change’s impact on risk disclosure
Financial and nonfinancial reporting are rapidly evolving to demand more assessment and disclosure of climate risk. These new demands are driven by:
- Investors. Investors want to know that organizations have solid plans for the societal impact of extreme weather. They’re listening to the climate change warnings: Of the world’s 64 stock exchanges, 15 issued ESG (PDF) (environment, social and governance) guidance and 23 committed to providing this guidance. Investors largely support climate-related reporting. For example, U.S. oil and gas companies must report on climate risk disclosure.
- Global regulations. Manufacturing is an international endeavor. Large European companies are leading the change on disclosure rules of nonfinancial and diversity information. To keep up with best practices and get ahead of new regulations, manufacturers are under pressure to follow new disclosure thresholds. More organizations are using Directive 2014/95/EU as a guide, which requires companies to include nonfinancial statements in their annual reports.
- Boards. When it’s possible for extreme weather to affect the bottom line, boards of directors want to see reporting on reducing corporate risk. The Financial Stability Board’s Task Force on Climate-related Financial Disclosure issued guidelines and recommendations for disclosure of climate-related risk in financial statements to be more transparent with not just the board, but investors and customers as well.
The bottom line is, we have entered a new phase of the company-to-stakeholder relationship that is more visible and demanding, which requires inclusion in business continuity planning. Response to these drivers is central to stakeholder understanding of a company’s multi-faceted, climate-related risk.
Start with the right questions
While the advancing set of sustainability and resilience reporting remains mainly voluntary in the United States, the need to respond is quickly intensifying — and it’s not going to stop.
In fact, preparing to respond — and actually responding — is its own internal risk-mitigation exercise. Collecting and assembling data about the potential vulnerabilities of assets, such as buildings with proximity to fire-vulnerable wildlands and forests or structural materials that are vulnerable to high winds and water intrusion, is crucial.
Then, organizations need to interpret the data across disciplines, evaluating progress, reporting internally and gaining internal stakeholder opinion, while developing external reporting methods. These are processes that help to develop a common internal and external disclosure methodology and improve organizational collaboration and resilience.
For example, prompted by investor requests for evidence of climate-event preparation for leased buildings, a large U.S.-based commercial real estate holding firm has added "building resilience audits" to its asset management responsibilities. The first phase involved tagging buildings with vulnerable characteristics, such as proximity to heavily forested areas. The second phase provides guidance for alterations that better protect these assets.
While some companies lag, many companies already using the internationally sourced U.N. Sustainable Development Goals. It’s a popular baseline for measuring and reporting progress in sustainability performance that is popular with external stakeholders.
Create a company-specific methodology
To help develop the best internal and external disclosure methodology — and improve organizational collaboration and resilience — organizations should collect and assemble data and interpret the data across disciplines. It’s also crucial to report internally and gain stakeholder opinion while developing external reporting methods. Leaders need to assess what’s material to the organization to build transparency about risks to business continuity.
Transparency is key in building trust between leaders and other stakeholders that the organization is doing all it can to protect itself from extreme weather and other climate-related events.
Questions that may help guide your materiality assessment:
- Have investor and customer relations received inquiries about climate readiness? (And can we help them address shareholder concerns?)
- What information can we collect to better understand and prepare for growing stakeholder concern about risk?
- Are real estate and logistics management aware of the risks that climate change poses to their core functions?
- Is our organization appropriately insured against all risks that are central to our business?
Once you evaluate the climate change risks material to your business, build a culture that knows how to manage uncertainty successfully. Ask:
- Do we encourage employees to report risks and potential risks?
- How can we better work on a constructive culture to build the awareness, literacy and capabilities needed to respond?
- What can we do to constructively encourage new ideas and shed the fear of making a mistake?
- How can we build resilience in our industry and contribute to the same in the communities where we do business?
Climate change is a part of our daily lives, regardless whether we acknowledge it. How we respond and how we manage the risk is what separates the leaders from the laggards. Leaders who acknowledge and manage the risks and, most important, create a culture that is responsive to stakeholder inquiry will advance the business community and set the new model for everyone else.