Climate change is an issue that organizations can no longer ignore. Employees, investors, business partners and potential clients want to know how your company could be affected and your plans for the future. Our guide will help you understand how to assess the climate change risks your organization faces, how to disclose them and why.
Use our risk matrix template to stay organized as you assess climate change risks in your organization.
What is Climate Change Risk?
A company’s climate change risks fall into two categories. Physical risks are more tangible and could “result from extreme weather events or changes in water availability,” according to the Center for Climate and Energy Solutions. Examples of physical climate change risks include:
- Damage to property, including buildings
- Supply chain disruptions
- Operations disruptions
In addition, your organization may face transition risks. For example, you may be forced to change your day-to-day operations because of new:
- Laws and regulations
- Boycotts or bad press
Every industry and geographical region face unique climate change risks. The supplies you need for operations, your area’s access to resources and your government’s laws and regulations all contribute to your risks.
What is the TCFD?
The Task Force on Climate-Related Financial Disclosures (TCFD) was established by the Financial Stability Board (FSB) in 2015. According to their mission, the TCFD “will consider the physical, liability and transition risks associated with climate change and what constitutes effective financial disclosures across industries.”
Their first set of recommendations were released in 2017, designed to “help companies understand what financial markets want from disclosure in order to measure and respond to climate change risks, and encourage firms to align their disclosures with investors’ needs.”
In short, the TCFD gives organizations a set of voluntary guidelines on how to identify and disclose the climate change risks they face. It’s just one of hundreds of mandatory and voluntary frameworks used around the world.
Why You Should Disclose Your Climate Change Risks
Climate change is one of today’s most sensitive topics, so why should you bother to disclose your risks at all?
Pablo Solomon, an eco-friendly designer and winner of a sustainable-living award, identifies two main reasons: “to be fair to potential investors” and “to justify spending to adjust these risks.” Investors need to be able to weigh your company’s climate change risks against the potential rewards of their investments. Boards of directors and upper management want to know that money is being spent on upgrades that will help the organization in the future and aren’t just trendy.
Disclosing climate change risks allows “investors, lenders, insurers and other participants in the market” to see “a more complete picture when assessing the value of” your organization. Investors and other stakeholders want to ensure the economy remains as stable as possible even in light of the uncertainties of climate change.
Also, when you assess climate change risks your company could face, you can better prepare for the future. Not only will you be able to proactively adjust your own procedures, but you’ll also be able to adapt to changes with your partners or supply chain.
Finally, more and more people are embracing a sustainable, eco-friendly lifestyle. “Consumers are choosing to vote with their hard-earned dollars,” says Casper Ohm, Editor-in-Chief at Water-Pollution.org.uk. “It’s important . . . to be transparent about your company and its operations,” he continues, especially because “word of mouth goes a long way on social media.” Honesty about how your organization approaches sustainable operations will make you more trustworthy to consumers and business partners alike.
You may be required by law to disclose. For example, publicly traded companies must file Form 10-K with the US Securities and Exchange Commission (SEC) each year, which includes a section on risk factors. Use this SEC guidance document to figure out if your company needs to disclose.
Five Steps to Assess Your Climate Change Risks
1. Conduct a Scenario Analysis
One of the TCFD’s key recommendations is that organizations conduct a scenario analysis. This method helps companies examine “what climate change will mean for their facilities, operations, supply and distribution chains, as well as demand for their products and services over a range of plausible scenarios.”
Analyzing the ways that climate change might affect your organization not only lets investors make more informed choices, but also helps you prepare for a variety of futures. Use this document from the TCFD to get started on your scenario analysis.
2. Read Your Industry’s Specific Guidance
The TCFD recommendations include specific guidance for some high-risk sectors:
- Agriculture, food and forest products
These industries face the most obvious risks (physical, transition or both) and require a bit more work when it comes to assessing and disclosing those risks.
3. Ask the Right Questions
As you start your climate change risk assessment, you may find yourself staring at a blank sheet of paper. To get started, EY suggests asking questions such as:
- What are the biggest emission sources your value chain?
- What types of climate risks is my organization exposed to in the long run?
- How will my products or services be affected by carbon policies and targets? What are the right anticipation and adaptation strategies?
- What are the incentives, instruments or indicators that can help you align your strategy with worldwide climate-related sustainability goals?
- Are the international climate policies and national commitments integrated into my business strategy, supply chain or sourcing strategy?
- What are my stakeholders’ expectations in terms of climate footprint and carbon performance?
- What is the potential exposure to new regulations? What assets are at risk and where?
- Are some of my products or activities at risk regarding worldwide climate-related sustainability goals? How can I turn this into a competitive advantage?
These questions will help you assess not only your climate change risks and opportunities, but can also help you create your risk management strategy. Revisit these questions annually to make sure your organization’s climate-related policies and procedures are up to date.
4. Integrate Risk Management Into Every Department
Laura Zizzo, founder and CEO of climate risk consulting firm Mantle314, says companies should share climate change risk information “funnelling to risk, strategy, finance and legal, with clear accountabilities all the way up to the board.”
While your organization might leave climate change risk management to marketing or PR departments, every employee needs to get involved. Communicate your risks and risk management strategy throughout the company. This proves to both internal and external stakeholders that you’re serious about tackling climate change risks.
5. Start Now
Assessing and disclosing climate change risks may seem daunting, but there’s no time to waste. “The earlier your company embarks on this journey and provides a platform to help educate directors and management about climate risks,” says EY, “the better positioned your company will be to engage with investors and shareholders on the impacts and opportunities for your organization.”
You’ll likely have to make major organizational changes for risk management and disclosure. Getting things right (and generating valuable data to share with stakeholders) could take years. Starting the process early shows you’re ahead of the sustainability curve and helps you avoid a frantic reaction to changes later.
More Climate Change Disclosure Resources
Knowing how to assess climate change risks and disclose them is hard when you’re starting from scratch. For instance, how do you know what is considered a risk or a green investment? Choose a framework to guide you, such as the TCFD or one of the other taxonomies below.