The challenges of reporting climate resilience

Source(s): BRINK

By Jane Stevensen and Lucy Nottingham 


The push to enhance climate risk disclosure is seen in the recommendations of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD). The TCFD sets out a framework for voluntary, consistent disclosures that consider the physical, liability and transition risks and opportunities associated with climate change. In short, it’s a framework that enables companies to disclose their climate risk profile and integrate that into mainstream financial filings. This provides investors with decision-useful climate-related risk information to better understand the risks they are running and steward capital allocation and financial investments more effectively.  


To meet these requirements effectively, many boards will need to expand their horizons around how they consider climate issues. Research undertaken by CDP and its sister organization, CDSB, (the Climate Disclosure Standards Board) suggests that more than eight in 10 companies report oversight of climate change issues at the board level. However, the global research also found that only 10 percent of companies actually incentivize boards to prioritize climate risks. Looking at U.S.-specific data, according to recent NACD data, only 6 percent of boards view climate change as a top-five issue impacting their company in the next year and only 9 percent over five years. Contrast this with the findings of the World Economic Forum’s annual Global Risks Report 2018, which ranks climate- and environment-related threats as the most likely and most damaging over the next decade.


Most businesses understand how to mitigate conventional risks, which can be relatively easily isolated and addressed with standard risk-management approaches. But when it comes to complex risks embedded in interconnected systems, such as those related to climate risks and the changes associated with a transition to a low-carbon economy, standard approaches don’t work.


Organizations face a variety of challenges and potential roadblocks in translating climate scenarios to integrated, meaningful financial analysis. Differing types of climate scenarios and widely varied outcomes (even across the most authoritative models) introduce uncertainty on which climate scenarios are appropriate to use. The next step is to translate these climate-economic scenarios into financial impacts. Most existing climate scenario models were developed for economic and academic use cases, not financial ones. Existing scenarios are not just a “plug and play” exercise and require thought and input from experts across the organization. As one company summed up the challenge: “In some sense, the process involves a lot of very educated guesswork, but not everyone guesses in the same way.” 


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