How can companies manage Climate Risk?

Climate risk is the term used to define the probable damage that climate change could do to an organization. It considers the likelihood of negative effects on people’s lives, physical condition, commercial, societal, and social resources. A variety of hazards contribute to climate risks. Some occur gradually (for example, changes in temperature and precipitation leading to droughts or agrarian losses), while others occur unexpectedly.

Climate risk management (CRM) refers to the actions and approaches used by persons or businesses to create a climate resilient environment. The goal of CRM is to encourage sustainable development by increasing the positive effects of climate change responses while minimizing negative effects along various kinds of topographies and sectors that are affected by climate change. CRM aims to address the effects of climate change and the full range of risks, from short-term extreme weather events to frequent long-term changes. According to a recent report by McKinsey, the changing climate is poised to create an array of economic, business and social risks over the next three decades. It is high time that business leaders start integrating climate risk into their decision making.

For the private sector, particularly in emerging markets, climate change presents both risks and opportunities. It may also impact the economic, environmental, and social performance of businesses, particularly those that rely on long-lasting fixed assets or have intricate supply chains.

There is broad acceptance within literature that we can categorize climate risk drivers into one of two categories: physical risks, which originate from the changes in weather and climate that effect the economy; and transition risks, which arise from the transition to a low-carbon economy.

Over the past few months, there has been a consistent rise in US regulatory and supervisory activity to track climate risks and evaluate their influence on global financial stability, along with increased awareness among top US financial institutions. In March 2021, the agency’s Division of Enforcement announced the creation of the Climate and ESG Task Force, whose goal is to “identify substantial gaps or misstatements in issuers’ ESG disclosures.” Since then, at least the Task Force has carried two enforcement actions out in the second quarter of 2022. Certain climate-related disclosures, such as information, would have to be made in registrants’ registration statements and periodic reports.

?Climate risk management (CRM) involves managing risk assessments, which has a four-step process which begins with planning and continues through the design, execution, supervising, assessment of the assessment cycle.

?Phases of Climate Risk Management include:

?CRM is planning for various future climate scenarios, adapting to and building tractability to adjust to an altering climate when an approach, project, or interest is expected to benefit.

1.????Conduct Screening/Assessment- Frame a climate risk governance framework and implement climate risk screening/assessment, including measuring risks, defining & addressing risks, and preparing for flexible management. The assessment also includes looking at prospects to build climate resilience.

2.????Incorporate Results- Incorporating climate risk assessment/review results denotes to the mixing of CRM into the designing of policies, strategies, and events. This stage allows teams to construct and implement adaptive risk management and resolution.

3.????Implement & Adaptively Manage- This stage involves integrating CRM into executing strategies and examining, evaluating, and educating procedures to make sure that climate risks are appropriately considered and achieved.

4.????Disclose the Results to stakeholders- The TCFD’s four recommendations on climate-related financial disclosures and the usage of scenario analysis will help businesses become more sustainable and involved in climate change mitigation. These disclosure recommendations show a connection between climate risk and a company’s work, businesses are more motivated to follow them. By following these disclosure recommendations, businesses can identify, evaluate, and address actual and potential climate change-related risks, leading to better investment decisions, secure assets, better business stability, enhanced reputation between stakeholders, and improved profits.

?The physical threats associated with climate change are severe and widespread. Climate change brought on by greenhouse gases may make it more difficult to live and work, for instance, by increasing the likelihood of deadly heat waves. Global warming will compromise food systems, material possessions, infrastructure, and natural environments. Consideration of climate risk management is long overdue.