Climate change poses significant risks and opportunities for businesses and investors. As a corporate sustainability professional, you need to communicate how your company is managing and disclosing these risks to your stakeholders, especially your investors. In this article, you will learn how to report climate change risks to investors using best practices and frameworks.
Reporting climate change risks is not only a matter of compliance, but also a strategic advantage. By disclosing how your company is assessing and addressing the physical, transition, and liability risks of climate change, you can enhance your reputation, reduce your costs, and attract more capital. Investors are increasingly demanding more transparency and accountability from companies on their environmental, social, and governance (ESG) performance, and climate change is a key issue. Reporting climate change risks can help you meet investor expectations, avoid legal disputes, and demonstrate your leadership and innovation.
Hire consultants or experts in this field to develop KPIs. Employers risk reporting intangible metrics relating to climate and sustainability when they’re unfamiliar with the subject matter which can contribute to appearing like the organization is just “greenwashing”, upsetting consumers, shareholders, investors, future investors etc.
provide a clear and concise overview of your organization's exposure to climate-related risks and opportunities. Start with a comprehensive assessment of physical, transitional, and reputational risks, using relevant metrics and scenario analysis. Clearly outline your mitigation and adaptation strategies, including emissions reduction targets, green investments, and risk management practices. Emphasize alignment with international climate agreements, regulatory compliance, and disclosure frameworks like TCFD. Present data in a visually engaging format, including charts and graphs, and convey the financial implications of climate risks. Lastly, emphasize your commitment to sustainability, resilience, and long-term value creation.
Climate change risk reporting is crucial for several reasons. It allows investors and regulators to understand how climate change affects the financial performance and resilience of companies and sectors. It also helps companies to manage their exposure to physical and transition risks from climate change, and to take advantage of opportunities from low-carbon transition. Moreover, it supports the alignment of financial flows with the goals of the Paris Agreement and the global efforts to mitigate and adapt to climate change. Furthermore, it enhances transparency, accountability, and stakeholder engagement on climate-related issues.
Reporting climate change risks is indeed a strategic imperative for businesses. Beyond the regulatory requirements, it's an opportunity to proactively manage these risks, ensure long-term sustainability, and gain a competitive edge. Investors and consumers are aligning with companies that demonstrate a commitment to addressing climate change, making it a win-win strategy for both the planet and the bottom line.
Put simply, if we don't account for climate change risks, then we're doing a disservice to the risk management of all other kinds of risk. I've outlined a non-exhaustive list of types of risk that can be related to climate action failure: competitor risk, compliance risk, financial risk, growth risks, human risk, market risk, legal risk, operational risk, reputational risk, security risk, strategic risk, sustainability risk. If a natural disaster hits your warehouse, it worsens all other risks. If a climate-induced migrant crisis affects your labor force, do you have the proper operations in place to manage that? Reporting climate change risks in your reporting can help you navigate these potential pitfalls.
The first step to report climate change risks is to identify them. You need to conduct a comprehensive and systematic analysis of how climate change can affect your company's operations, assets, markets, and value chain. You can use various tools and methods to identify climate change risks, such as scenario analysis, materiality assessment, risk matrix, and stakeholder engagement. You should consider both the short-term and long-term impacts of climate change, as well as the direct and indirect effects. You should also prioritize the most significant and relevant risks for your company and your investors.
I recommend organizations adopt climate risk analysis tools, particularly for assessing physical climate risks. These tools are backed by climate scientists who analyze historical data and projections. Accurate risk identification is essential for effective risk mitigation and the pursuit of opportunities.
The effects of climate change on the natural world, human society, and the economy are called climate change risk. To find out how climate change can affect different aspects of life, we need to look at both the physical dangers and the social and economic consequences of a changing climate. There are various ways to do this, such as: The TCFD framework is a set of guidelines for reporting how climate change can create risks and opportunities for financial activities. The VMIA Climate Change Risk Management approach uses the principles of risk management to help organizations deal with climate change. These are some examples of how to find out climate change risk.
Addressing climate change risks is not just a moral imperative; it's a strategic necessity. Identifying and assessing these risks is crucial for a company's resilience and long-term success. By doing so, businesses can make informed decisions, adapt, and contribute to a more sustainable future while safeguarding their own interests and those of their stakeholders.
Climate scenario analysis is an evolving science. However, we can say we are in a very good place right now and we have plenty of tools to support a proper climate risks identification. My favourite tool is the WWF Guidance on science-based climate risk disclosure. I strongly recommend this framework to define your scopes, builp-up your sources, describe your models and methods etc.
Initially, I try to sit down with representatives from each department, understanding their path and objectives within the business, whether they want to transition or solve a specific problem. Subsequently, we analyze the associated risks at the ODS or ESG levels, depending on how they have been integrated into the company. We provide solutions to these risks at various time stages and for different stakeholders involved. We establish our success indicator for each case, and if it's not functional, we repeat the previous steps and generate new strategies.
The next step to report climate change risks is to measure and manage them. You need to quantify and monetize the potential costs and benefits of climate change risks and opportunities for your company. You can use various metrics and indicators to measure climate change risks, such as greenhouse gas emissions, carbon footprint, energy efficiency, water consumption, and waste generation. You should also develop and implement strategies and actions to manage climate change risks, such as mitigation, adaptation, resilience, and innovation. You should align your climate change risk management with your business objectives, policies, and governance.
Measuring and managing climate change risks is not just about compliance; it's a path to competitiveness and sustainability. Quantifying these risks and embracing opportunities not only enhances a company's environmental performance but also its financial health. It's a win-win, benefiting the planet and the bottom line. Companies that integrate climate risk management into their strategies are better positioned for the future.
To measure, correct, and ensure that we are truly making changes in our corporate structure, it's crucial to have indicators. Some examples are KPIs, but what matters here isn't their name but rather the flexibility, measurement frequency, the target audience for the indicator, and how much significance we assign to it as a company and within the system. The success and outcomes we achieve depend on these factors.
For a correct measurement of climate change risks, is vital that your exisiting KPIs have been properly set. You cannot measure what you don't fully know or fully understand. This is about seting SMART goals first to be able to track progress and enable measurement. Now, how to measure? This is a key part of your risk managemet strategy and will be defined by your sectorial or individual approach. I can think of some approaches like: emissions-based, alignment-base or even contribution-based.
Not just measure the impact of climate on your company, but measure the impact of your company on climate. This is in my opinion what GHG protocol does.
I'd like to add the importance of setting interim milestones on the road to long-term objectives. These serve as checkpoints for evaluating and fine-tuning your strategies. Accountability mechanisms, such as internal audits or oversight committees, can reinforce the robustness of your climate risk management framework. These internal checks help identify areas for improvement, fostering a culture of continuous betterment. Consider external assurance to bolster credibility and provide stakeholders with an added layer of confidence in your climate risk management practices.
The final step to report climate change risks is to disclose them. You need to communicate your climate change risk identification, measurement, and management to your investors and other stakeholders in a clear, concise, and consistent manner. You can use various formats and channels to disclose climate change risks, such as annual reports, sustainability reports, investor presentations, and websites. You should follow the best practices and frameworks for climate change risk disclosure, such as the Task Force on Climate-related Financial Disclosures (TCFD), the Global Reporting Initiative (GRI), and the Sustainability Accounting Standards Board (SASB). You should also provide evidence and assurance for your climate change risk disclosure, such as data sources, verification, and audit.
The European Sustainability Reporting Standard (ESRS) is relevant as a disclosure standard in the European Union. It has just been published on 31 July 2023.
Transparent climate change risk disclosure is not just an ethical gesture; it's a fundamental building block of trust and accountability. Companies that openly share their climate strategies and actions empower stakeholders to make informed decisions, foster investor confidence, and drive positive change. By adhering to established frameworks, they ensure consistency and credibility in reporting, which is essential for a sustainable future and responsible corporate citizenship.
Disclose risks along with mitigation strategies and potential opportunities to offer investors a complete perspective. Climate risk assessment tools often provide risk assessments without factoring in site-specific mitigation measures. For instance, a climate risk tool may indicate that the risk of extreme temperatures poses a 30% threat to asset value due to rising cooling costs. However, these risks can be mitigated by implementing efficient cooling systems and securing long-term renewable energy contracts to leverage future opportunities, especially in the face of potentially high grid energy prices.
I totally agree. Disclosure, and I mean, full disclosure, is enclosed in your chosen sustainability reporting framework. Again, I don't believe there is only one perfect framework, rather I think there is "a more suitable" or "a more industry/business model representative" framework for your company. Your disclosure should refelct your climate change baseline measurement, and should be alligned with your targets. Make sure your disclosure is science based, that your data can be verified by external assurers and that the double materiality principle is present.
Communication of our achievements, progress, and challenges within our company should flow from the inside out. We must always communicate them internally to stakeholders first, followed by our investors, external buyers, civil society, institutions, and so on. When facing strong opposition from civil society on a project, for instance, I always recommend maintaining open and thorough communication, providing them with all the information. This is the only way to gain trust and approval.
Reporting climate change risks is not a one-way process. You need to engage with your investors and other stakeholders on your climate change risk disclosure and performance. You can use various methods and platforms to engage with investors on climate change risks, such as surveys, meetings, webinars, and forums. You should listen to and address the feedback and concerns of your investors and other stakeholders on your climate change risk disclosure and performance. You should also showcase your achievements and best practices on climate change risk management and disclosure, and seek collaboration and partnership with your investors and other stakeholders on climate change issues.
At Italgas, we consider climate issues an integral part of our strategy, since communicating climate change opportunities and risks to the market is crucial. The Group discloses such issues in both Integrated Annual Report and TCFD Report. In this latter, in particular, risks and opportunities related to climate change are thoroughly outlined also indicating their time horizon, likelihood, financial impact and main management methods. The overall climate strategy is also disclosed, in order to make as clear as possible to investors and stakeholders the tangible actions that Italgas is implementing to evolve its business and to have a pivotal role in the energy transition.
Engagement with investors and stakeholders on climate change is not just a checkbox; it's a dynamic dialogue that drives progress. By actively involving them, companies can tap into valuable insights, build trust, and foster collaboration. Listening to concerns, sharing successes, and seeking partnerships amplify the impact of climate risk management efforts. It's a collective journey towards a sustainable future, and collaboration is the compass guiding us in the right direction.
"Banks, insurers, asset managers and institutional investors are the driving force of greening the financial system". This is the reason why is so important to engage with them timely and properly. Much has been discussed in which are the best strategies for engagement. In my experience, I can think in a mix of: constant and effective communication and impact investing. However you do it, make sure to deliver clear messages and tangible results. Make use of your sustainability reporting KPIs to engage your investors in your climate journey, fostering accountability and trust.
A fact-supported, secure stance, with concrete evidence and case examples, will always guide us to explore new possibilities. We can start with a short-term commitment, renewing agreements as needed. This approach will help us convince others about the realities, benefits, and costs of not transitioning due to climate change.
Reporting climate change risks is an ongoing and evolving process. You need to monitor and evaluate your climate change risk disclosure and performance, and identify areas for improvement and innovation. You can use various tools and benchmarks to improve your climate change risk reporting, such as ratings, rankings, indexes, and awards. You should also keep up to date with the latest trends and developments on climate change issues, and adapt your climate change risk reporting accordingly. You should also learn from and share your experiences and best practices with your peers and industry leaders on climate change risk reporting.
An additional consideration is understanding how the climate risks are a multiplier for existing enterprise risks to create new risks. Considering the nexus between climate change risk and nature/biodiversity risks. Increasing organizational system intelligence to report comprehensive on all the internal and ?external ?risks for the business corporation. Benchmark your reporting against best practices and find ways to improve continuously on your efforts on this dynamic landscape.
At present, due to uncertainties associated with tools, models available etc. the investors are not looking for accurate numbers to quote. So, dont wait for perfect models with accurate results to be available. Taking first steps helps create lot of internal capacity through inter-departmental discussions and brings to highlight some risks. Also, these voluntary exercises help in preparation of upcoming regulations in the climate risk reporting e.g. from market regulators or governments. In improving the reporting, subsequent to the first steps, one can always look show resilience to different scenarios through appropriate steps and transition planning, keeping budgets for the implementation of mitigation measures.
Climate risk reporting is a continuous journey, not a destination. Staying updated, learning from others, and embracing innovation is the key to progress. The climate landscape is ever-changing, and companies must evolve their reporting practices to remain relevant and effective. Sharing experiences and best practices within and beyond your industry is a powerful way to collectively address this global challenge. In this ongoing process, we'll find the resilience and solutions needed for a sustainable future.
This involves conducting a comprehensive assessment of the organization's exposure to climate-related risks and identifying specific risks that could impact business operations and financial performance. Emphasizes the importance of quantifying these risks using scenario analysis and integrating them into overall risk management frameworks. Use internationally recognized reporting frameworks like the Task Force on Climate-related Financial Disclosures (TCFD) to guide disclosure practices. Proactively engage with investors to discuss climate-related risks and mitigation strategies, fostering transparency and building trust. Finally, they highlight the importance of continuous improvement, monitoring, and review of reporting practices.