Risk managers have a key role to play in facilitating climate disclosure

Working with their insurers, risk managers can make climate-related disclosure a relatively painless process, according to Amar Rahman and Belinda Bates of Climate Resilience, by Zurich Resilience Solutions.

Businesses are increasingly having to assess and disclose climate change-related risks, as well as their mitigation activities. Stakeholders want to understand the impact a business has on the environment and what the organization is doing to reduce greenhouse gas emissions and mitigate the worst effects of climate change.

There are now a number of established voluntary frameworks to facilitate climate change-related disclosure, such as the Task Force on Climate-Related Financial Disclosures (TCFD), while a growing number of compulsory regimes are in development or under consideration. In October, the UK announced it will make it compulsory for large companies to disclose their climate-related risks and opportunities, in line with TCFD recommendations. It follows similar moves by Switzerland, Japan, New Zealand and Australia, while the US Securities and Exchange Commission is currently working on its own climate change disclosure rules.

Reducing risk through transparency

Climate-related disclosure will eventually become a requirement for doing business, with transparency demanded by investors, banks, insurers, supply chain partners and customers alike. It would, however, be a mistake to view climate change disclosure only as a compliance or box-ticking exercise. Frameworks like the TCFD can form the foundation for an organization’s climate change strategy, informing decision making, raising awareness and giving rise to solutions.

Disclosure frameworks also have clear relevance for risk management. Frameworks like the TCFD require organizations to identify and assess climate change-related risk, and demonstrate actions taken to mitigate and monitor them. Transparency on climate change-related risks and actions should, therefore, help to manage risks in the medium and long terms.

Risk data and perception

If they have not already, most large companies are now in the process of creating sustainability reporting functions to facilitate climate change-related disclosure under the TCFD, or similar frameworks. However, very few companies have the required expertise and capabilities inhouse, and most do not even know where to begin.

For most organizations, the biggest challenge is likely to be data: where to find it and how to incorporate it into risk management scenarios. Few organizations will have access to all the necessary data and tools – such as climate data – and neither will they have the methodology to integrate it with strategic tools, models and climate change scenarios.

From working with clients, we have seen how easy it is for organizations to get lost in the detail of the process, which cuts across business units and involves complex risk concepts and climate science. For example, taxonomy is not as straightforward as it may seem, as concepts such as ‘criticality to operations’ will need to be clearly defined, as well as basic concepts, such as ‘risk’ itself. The meaning (and perception) of physical, reputational, operational, and other types of risks varies across an organisation (and across geographies for those organizations with a global footprint). Assessing the accuracy and confidence levels of modelled output can also be challenging, given the uncertainties of climate science.

Risk or opportunity?

Much of the process of climate change-related reporting is essentially a risk management exercise, and risk managers can play a key role in establishing and running the process. In their central cross-divisional role, risk managers are well positioned within their organizations, with a good overview of the value chain and understanding of criticalities.

One of the challenges of climate change reporting is to make the risk tangible and to communicate risks in a way people can understand – a core competency of risk managers. Many effects of climate change and global efforts to reduce emissions of greenhouse gasses are difficult to predict, while concepts like the probability and severity of future extreme events can be hard to grasp.

Risk managers can also leverage their relationships with the insurance community, which is increasingly developing solutions to help customers adapt to climate change and manage the transition to more sustainable business models. Companies can tap into the expertise and capabilities of insurers like Zurich that have a long history of assessing natural hazard risks and working with clients to build resilience and develop solutions.

Help is at hand

While reporting frameworks and regulatory requirements differ, they all require businesses to establish a formal process to collect and analyse data, to identify and quantify critical risks, and to develop and demonstrate the likely impact of mitigating actions. This will be new for most companies. But while it might initially appear a daunting task, with the right help, establishing a climate change reporting process need not be complicated.

Much of the data needed to report the physical risks of climate change already exists, both within organizations and with third parties. For example, insurers hold much of the data and tools required for the TCFD process, such as natural catastrophe claims history, insureds’ exposure data, and how that exposure will evolve under various climate scenarios.

Climate Resilience, part of Zurich Resilience Solutions, proposition has been supporting a growing number of organizations with their TCFD reporting. Climate Resilience, by Zurich Resilience Solutions, can work with companies to formulate their response to TCFD, develop a roadmap and provide a methodology, data and modelling tools to assess climate change risks, as well as drilling down and developing solutions tailored to the sites identified as high risk.

Step by step

Climate change-related disclosure is set to expand rapidly in coming years and will increasingly be driven by regulatory requirements, as well as an increasing sense of social responsibility in large organizations. Building a process to assess and report climate change risks and opportunities is an iterative process, and the sooner companies start, the better. By starting with the data that is easily accessible, organizations can prepare for mandatory frameworks, as well as kick-start the process of developing climate change solutions.