Eight top tips for reporting environmental risk and becoming a more climate-resilient business
Climate risk reporting is now mandatory for some UK firms, and similar mandates are coming into play globally. So, how can businesses disclose properly and go beyond a ‘tick-box’ approach to unlock new opportunities and build in resilience?
That was the topic of discussion at edie’s most recent webinar, which was hosted in association with Manifest Climate and had the theme of ‘moving from risk to resilience: practical solutions to climate-proof your business’.
The session originally aired on Thursday 23 June and is now available to watch on-demand featuring experts from Manifest Climate, Avara Foods and the FAIRR Initiative.
Speakers provided advice on complying with mandates on frameworks like the Task Force on Climate-Related Financial Disclosures (TCFD); going beyond compliance to shape company strategy and governance; engaging key stakeholders to enhance adaptation and resilience and measuring opportunities as well as risks.
Here, edie rounds up nine of the top tips provided by the expert speakers during that session, with advice for professionals at all stages of their journey towards improving climate resilience at their organisation.
Start with awareness-building
Manifest Climate’s climate strategist Pete Richardson said he generally sees organisations falling into one of three stages with their climate risk management journey – early, middle and advanced. At the early stage, he explained, risk and/or sustainability professionals are likely “still demonstrating why climate action matters to the business”.
Similarly, Avara Foods’ senior advisor on environmental sustainability and governance, Baishakhi Sengupta, said that raising awareness about different kinds of climate risk and how these will impact the organisation’s value chain is a “critical starting point”. Without basic understanding and motivation, she said, key verticals will not be included in measuring and acting on risks to the extent they need to be.
All speakers agreed that there is now more pressure on businesses than ever to take climate action, with bottom-up pressures like public awareness and employee demands compounded by changes to national climate targets and related regulations and legislation. Investors are also demanding more climate action from the firms and projects they support.
Nonetheless, they agreed that this does not automatically translate into an understanding of climate risks across the value chain. Sengupta noted: “In my experience, I don’t think that risk management is embedded into sustainability teams or reporting – or vice-versa. That’s where one of the first challenges is…. Normally, organisations have enterprise risk management very well embedded – mainly in the financial lens. But sustainability can still sit like an add-on.”
Another early-stage action item raised by Richardson include emphasising that action is better than perfection. He spoke of how some boards won’t announce a net-zero target without being sure it will be delivered, or produce a risk report and admit there will be more additions in the second year and third year. Yet this can slow progress.
Different people, it was noted, will be motivated by different things – whether that is avoiding physical risk, unlocking innovation opportunities or attracting and retaining top talent. In any case, having data and statistics to hand will help professionals to make their case.
Look at where your disclosure gaps are
Of course, disclosing environmental risk will not, in and of itself, result in an organisation avoiding risk. But it is, the speakers agreed, an important first step. Without accurate, up-to-date measurements of impacts and risks, businesses cannot create appropriate strategies to respond to them, focusing on the most material issues and providing adequate investment.
The FAIRR Initiative’s climate economist Simi Thambi talked listeners through the climate risk analysis her organisation conducted with 40 of the world’s largest companies involved in animal agriculture. Most of these companies were not disclosing their impact on forests and biodiversity; their water use and exposure to water risks; their pollution impact and exposure, and so on. While disclosures on emissions was stronger, the average company scored just 26% by FAIRR’s assessment. A key pitfall was reporting on indirect (Scope 3) emissions.
Disclosure frameworks and platforms now exist at scale, including CDP.
Plan appropriate time and resource for disclosures
Avara Foods’ Sengupta said that, in her experience, large businesses will need to dedicate around six to nine months to the scenario analysis part of the TCFD process if they have two or three full-time staff working on this activity. She emphasised the importance of gaining a “true picture” of the most likely and most sizeable risks and opportunities.
Scenario analysis involves measuring the impacts of climate risk to a business’s operations and value chains in at least two different climate scenarios. Many organisations choose different temperature pathways, as already set out by bodies like the IPCC or IEA. To complete scenario analysis, organisations should provide qualitative and quantitative information. The TCFD has repeatedly posted slow progress on the uptake of scenario analysis.
There is also a growing interest in using ‘double materiality’. This involves measuring the risks your organisation poses to the environment, and the risks that environmental damage poses to your organisation. This takes time.
Look at scenario analysis impacts on different parts of the value chain
Building on the second and third tips above, FAIRR’s Thambi and Avara Foods’ Sengupta highlighted the importance of looking at risk in terms of asset class or activity. This will ensure that you design appropriate interventions and disclose the granular information that investors want.
FAIRR has recorded how risks are different for firms at different parts of the value chain, for example, a fast-food chain compared to a meat processor or a farmer. Risks also differ for different kinds of meat. Beef farmers, for example, will be worse affected by heat stress and rising feed prices than pork or poultry farmers. Poultry farmers have higher electricity demands than their counterparts. And so the differences go on.
Sengupta also asked listeners to consider whether businesses have franchises or joint ventures; the geographical location of their assets, and so on, as important context factors informing risk.
All speakers agreed that it is important to make these distinctions in the supply chain as well as operations. For most large organisations, this is where most of their environmental impacts and risks will sit. As such, engaging suppliers can be key to fully realizing opportunities. Richardson used Walmart’s ‘Project Gigaton’ initiative on supplier emissions as a case study.
Don’t ignore substitution risk
Sengupta presented a diagram of a pyramid of risk management, with macroeconomic risks at the top and strategic risks in the middle. This category includes legal and regulatory risks, competition risks and reputational risks.
On competition risks, FAIRR’s Thambi raised an important point around substitution risk, which she believes many food firms are not properly accounting for. A lot of new commodities are coming to the market and that will pose competition to some conventional commodities,” she explained. “For instance, in the meat sector… we see that the market for alternative proteins is expected to grow significantly.”
Other examples of substitution risk include the shift towards electric vehicles (EVs) in the road transport sector. In the coming decades, substitution risk may crystallize for petrol and diesel in the form of other alternative transport fuels like hydrogen.
Manifest Climate’s Richardson said: “Accounting is one part of a three-legged stool, the other legs being an understanding of risk and of opportunities. This last bit is critical.”
He noted how, without properly assessing the opportunities of taking climate action, risk management and sustainability teams alike would find it harder to build and maintain support and motivation in other key departments.
It is, he admitted, sometimes harder to measure potential opportunities. Nonetheless, there is a growing body of research outlining the overall benefits to companies of climate action, whether that is through avoided risks (physical or transition), or relating to new opportunities to provide innovative products and services developed and delivered by top talent.
He said that every time a vertical comes up with a risk, they should also propose an opportunity, regardless if they can fully and accurately quantify it. “This gives a good picture of where the company could go,” he said, highlighting how this activity can unlock creativity and ambition.
Build-in good governance
Going beyond simply reporting will be necessary to properly address risks and to unlock the extent of the opportunities available. All speakers spoke of the importance of making sure that the business is either unable to – or highly unlikely to – make decisions that would increase climate risks.
Sengupta said: “Having a nominated C-level executive working with the board member who represents sustainability will be very important… What we don’t want is too much noise in the boardroom to the point that people feel it’s only a risk.”
Also raised were interventions like changing supplier contracts to require more environmental disclosure; linking executive pay to ESG targets; adding ESG to all employees’ KPIs and rewarding staff below the executive level for strong progress. It was noted that SMEs can implement these changes just as well as larger firms.
“Once we do start to see the integration, you start seeing opportunities outpacing risk,” Richardson summarised.
Keep track of the global climate risk disclosure landscape
Not all businesses in all geographies are legally required to report on climate risk – but it is becoming more common and this trend is expected to accelerate in the coming years. Resilience involves keeping ahead of the regulatory curve to avoid unexpected costs.
Richardson said that, once countries set a net-zero target, they will see disclosure mandates as “invariably necessary” to meet them. 90% of GDP is now covered by net-zero targets and mandates are being introduced in places including the UK and the other G7 nations. He added: “Look at disclosure rules around the world. They’re either relevant to you now, through your value chain, or they are a sign of things to come.”
Most mandates are based on the TCFD at this point, but Richardson urged viewers to be mindful of slight differences in different nations.
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