Sustainability and material climate risk reporting: Is it just a gruelling box ticking exercise?

The time, resources and efforts put in reporting may sometimes feel like a worthless task. Teams and companies feel the fatigue of all these requirements and regulations coming from all flanks asking for all sorts of data. Thousands of pages on sustainability and climate risk are being published and more often than not left unopened, leaving us with the question: Is it even worth it?

Truth is, a material climate risk assessment is more than a reporting exercise as it can have a significant impact on a company's financial performance and long-term viability. Climate risks can be?

a) physical risks: caused by extreme weather events such as floods, droughts, or wildfires, all of which can damage property, disrupt operations or cause supply chain disruptions;?

b) liability risks, as companies can be held liable for the environmental damage caused by their operations, losses caused by their lack of action towards their physical risks, or for failing to adequately disclose climate-related risks to investors;

or c) green transition risks, as the transition to a low carbon economy can impact their operations through new regulations, change in consumer preferences, or stranded assets.

These risks can have a direct impact on a company's bottom line, through increased costs, reduced revenue, and asset impairment. But not only that, climate-related risks can damage a company's reputation and make it more difficult to attract and retain customers and employees.

Therefore, it is essential for companies to go beyond simply reporting on climate-related risks and instead also develop and implement strategies to manage and mitigate those risks. This may involve investing in new processes and acting to physically protect their assets, diverting their investments towards renewables, improving energy efficiency, or developing new products and services that are more resilient to climate change.

From a business perspective, managing climate related risks may make a difference to a company’s future viability, protect their financial performance and reduce financial losses and improve competitiveness. From a reputational perspective, taking mitigating measures towards climate related risks may also strengthen its reputation among stakeholders, and attract and retain talent.?

Insurance companies for example, are particularly exposed to climate-related risks. Their business model is based on taking on risk and providing financial protection to their policyholders.?

Climate change is increasing the frequency and severity of natural disasters, which can lead to significant losses for insurance companies. For example, in 2022, the insurance industry incurred over $120 billion in losses from natural disasters, according to Munich Re.

It is also creating new and emerging risks for insurance companies. For example, sea level rise and prolonged rains are increasing the risk of flooding in certain areas, and extreme heatwaves are increasing the risk of wildfires. So, insurance companies need to be able to identify and manage these new risks in order to remain profitable. If insurance companies are not prepared, the increased frequency and severity of natural disasters may lead to higher claims payouts and reduced profitability.

Climate change is also putting pressure on insurance companies to offer new and innovative products and services and policyholders are increasingly demanding insurance products that can protect them from the financial impacts of climate change. For example, some insurers are now offering parametric insurance products, which pay out a predefined sum of money based on a specific climate event, such as the amount of rainfall or the wind speed.

In addition, climate change is becoming a reputational risk for insurance companies. Customers expect their insurers to be taking action to address climate change, and when an insurance company is seen as being slow to adapt to climate change, it may risk losing customers, partners, and funding.

Thus, insurance companies will need to develop and implement strategies to manage and mitigate their own climate-related risks, as well as offer new products and services that can help their policyholders adapt to climate change. This will involve a tremendous money and time effort, but as we have highlighted, it will protect their financial performance and reputation.